The importance of humility in investing
Joel Dresang: Art, I want to talk with you about something that you bring up from time to time as an important ingredient for long-term investing and that’s humility. What do you mean by humility?
Art Rothschild: Joel, to me, humility represents the fact that we know that even though we know what might happen in the future in the markets and in the economy, we’re never certain as to what precisely is going to happen. So, it’s a discipline that causes us to prepare better for alternative outcomes so we’re ready for anything.
Joel: So, how does that apply to investing?
Art: The average investor without appropriate discipline will tend to invest on the basis of emotion. They’ll time the market too often. They’ll be too affected by news. They’ll act impulsively.
What investing with humility does is it gives the investor discipline. They prepare better for what could happen – instead of assuming that something’s going to happen and investing accordingly. So, it really does help them be more patient and let investment themes evolve as the markets change. They’ll make more money. They’ll have more consistent returns over time.
Joel: So, it’s knowing that you can’t always be right but that you can always be prepared.
Art: Yeah. It’s sort of like a baseball player. If you have a hitter who’s very good at hitting home runs, but every time he gets up to the plate, he swings for the fences, he’s going to strike out too many times.
His batting average won’t be as good as it would have been if he was more disciplined. Getting up to the plate and getting a single, a double, a triple every once in a while and then every once in a while, that good pitch will come, and he’ll hit it out of the park.
He’ll have a better average and do better over the long haul because of his discipline.
Joel: How do you practice humility?
Art: I practice humility on a regular basis by being well educated. Again, this discipline that you mention or that we discussed before, it’s working with our colleagues to do constant research. Reading on a regular basis. Forming our own conclusions as to possible alternative outcomes, not just outcomes that are anticipated widely. And humility causes us then to back up and consider alternatives and invest in a manner that will allow us to have an answer just in case things don’t work out the way we anticipate.
Joel: What tools do investors have for humility?
Art: Okay our two favorite tools to practice humility in investing are balance and diversification.
Balance is the concept of using stocks and bonds in an appropriate mix to smooth out the ride. If stocks are doing better, your stocks will do well. If stocks do poorly, your bonds will help stabilize your portfolio.
And then, diversification. Having different types of stocks in a stock portfolio. Different types of bonds in a bond portfolio. Because different types of stocks and bonds do differently in different environments.
So again, the discipline, the preparation that goes into putting together a portfolio, using both balance and diversification, help us to invest again more humbly and do better over the long haul.
Joel: What’s the best advice that you have for somebody to practice humility in their investing?
Art: I think the best thing for any investor to do is to acknowledge the fact that they can’t be right all the time and to invest with discipline, preparation and knowledge and be ready for anything.
(initially posted March 17, 2017)