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The Test of a First-Rate Investor

January 31, 2022

“The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function.” – F. Scott Fitzgerald

The above quote from F. Scott Fitzgerald is one that has stuck with me for many years. In every realm of thought – economics, philosophy, theology, etc. – opposed ideas inevitably arise that cannot be easily resolved. Every thinking person must therefore learn to allow these opposed, unresolved ideas to coexist in their minds without allowing that opposition to drive them crazy. Rather than surrendering to a perpetual state of cognitive dissonance or intellectual stasis, learning to manage this tension should instead lead to more balanced analysis and thoughtful decision-making.

This is particularly true in the realm of investing, where Fitzgerald’s challenge is amplified by the following factors:

  1. The financial markets are vast and full of infinite variables,
  2. The world is awash with data and information,
  3. Everybody has opinions, and a platform to share those opinions, and
  4. There’s money involved and the stakes can be high, which makes us more prone to emotionally driven, irrational behavior

Knowing what to do, and what not to do, with your money under these circumstances isn’t easy. The test of a first-rate investor, then, is to hold a lot of opposed ideas in mind and still retain the ability to stay invested.

Here are just a few contradictory ideas that investors are commonly forced to reckon with:

  • It’s better to buy low and sell high, but waiting to buy low usually leads to buying higher later.
  • Time is the ultimate “edge” in investing because it allows you to stack the odds in your favor. The problem is, nobody knows how much of it they have.
  • Higher returns require higher risk, which could lead to lower returns.
  • Lower risk means lower returns, which could lead to bigger risks like outliving your money.
  • Diversification means gaining exposure to more winners and more losers.
  • Successful investing involves sticking to a plan, even when it’s tempting to deviate. It also involves being adaptable, which sometimes means deviating.
  • “This time is different” is never true, except that sometimes it is.
  • “Market experts” and “legendary investors” predicting the next market downturn are often featured in the media, and they’re usually wrong. On the other hand, even a broken clock is right twice a day.
  • Intelligent investing takes a lot of work, but it doesn’t involve a lot of action.

With all of these opposed ideas in mind, make sure you have a plan (and a planner) that enables you to stay invested.

And Now For Something Completely Different…

I’ll go out on a limb here and say that no living person can write about a subject as dry as tax law with more clarity, insight, and humor than Tony Nitti. But don’t worry, because the article I’d like to share has nothing to do with the Internal Revenue Code. Instead, in his latest edition of “New Year’s Resolutions Every Tax Pro Should Make,” he – through the voice of his beloved dog, Maci – offers five poignant bits of advice that we would all do well to follow.

The Five New Year's Resolutions Every Tax Pro (Human) Should Make