Of all the valuable life lessons the late Charlie Munger taught us, the one that stands out for me is the importance of learning from others. (1)
“I believe in the discipline of mastering the best that other people have ever figured out," Munger said. “I don’t believe in just sitting down and trying to dream it all up yourself. Nobody’s that smart.”
Someone who shares this view is Shane Parrish. Shane edits a hugely successful blog called Farnam Street and is the author of a best-selling book entitled Clear Thinking. (2)
The book’s central argument is that one of the keys to success is positioning. “You don’t need to be smarter than others to outperform them if you can out-position them,” Parrish writes. “Anyone looks like a genius when they’re in a good position, and even the smartest person looks like an idiot when they’re in a bad one.”
He wrote Clear Thinking, he says, to give people the tools to master their own fate, sharpen their decision-making, and position themselves for success.
Parrish is a longstanding advocate of regularly investing in low-cost index funds. Although this isn’t a book about investing specifically, the lessons it teaches are very relevant to investors. So let’s look at four of those lessons and the key takeaways for those who want to improve their investment outcomes.
1. Press pause before making a decision
Important decisions, including investment-related ones, should be made with care and attention. They should be based on evidence and reason, and they certainly shouldn’t be rushed.
Unfortunately, human beings tend to default to acting instinctively, which can often lead to mistakes. For example, we let emotions overwhelm facts and logic. We prioritise protecting our egos, ideas and status over finding the best solution. We also tend to go along with the crowd, or we stick with the status quo out of habit, even when change might bring improvement.
The key, Shane Parrish explains, is to pause to reflect, and give yourself a few moments to observe when your thinking aligns with these defaults. Pausing like this before making a decision — buying or selling stocks, for example, or investing in a new fund you’ve read about — can give you the clarity of thought you need.
2. Work on strengthening your reasoning abilities
The defaults I’ve just described are deeply ingrained; they’re part of our evolutionary make-up. But the good news is, you don’t have to be enslaved to them. You can, instead, learn to improve the quality of your decisions. For example, you can:
Become more self-accountable and take more responsibility for your actions. This means owning your mistakes and not blaming circumstances or other people when the choices you make backfire.
Increase your self-knowledge by exploring and accepting your strengths and weaknesses. You can also enlist the help of others (a financial adviser, for example) to complement gaps in your skills or knowledge.
Work on your self-control by trying to get a handle on unhelpful emotions like fear and greed, and learning to recognise when you’re in danger of letting your emotions get the better of you.
Build self-confidence by educating yourself about investing and developing a clearer understanding of what you do and don’t know, plus what you can and can’t control.
3. Set rules to counter unhelpful impulses
Shane Parrish is a big fan of rules, whether that’s only drinking at weekends, or skipping dessert to help control your weight.
Investors, too, can set rules to improve their outcomes. For example, they can automate their investments so the money goes out of their account on the same day each month without them having to think about it; or they can decide that whenever they receive a pay rise, they will invest that extra money instead of getting used to spending it.
Parrish also recommends inserting friction between you and whatever you’re trying to avoid. So, for example, if you’re worried about trading too often, ask your partner to set the password for your trading account and keep it hidden from you. If you’re the sort of investor who gets distracted by market forecasts or the latest investment trends, put the financial section of your Sunday newspaper straight in the recycling bin so you’re not tempted to read it.
4. Focus on your own goals, not other people’s
The fourth and final lesson Clear Thinking teaches us is that making sound decisions requires you to have clarity on what your goals are.
If we allow them to, social conditioning, ego, emotions and inertia can often dictate values and priorities.
The best way to prevent that, Parrish suggests, is to imagine yourself at the end of your life. Ask yourself: How do I want to feel? What are the differences between how I’m living now and the outcome I imagine? What do I need to change to close that gap?
A mistake that many investors make is that they don’t align their investment or other financial decisions with their personal values, so they end up playing someone else’s game.
Remember, investing isn’t an end in itself; it’s a means to an end. The purpose of it is to help you live the life you really want. If you don’t yet know what that life looks like, work it out. Better still, hire a financial planner to help you.
Clear Thinking, Turning Ordinary Moments into Extraordinary Results by Shane Parrish is published by Cornerstone Press.
This article is produced by us for Financial Advisers who may choose to share it with their clients. Timeline Planning and Timeline Portfolios do not offer direct-to-consumer products.
Robin Powell is a journalist, author and editor of The Evidence-Based Investor.