All that we are as individuals are a result of a combination of the choices that we have made throughout our lives, our environments and the experiences that we have had since childhood.
We do not get to choose who our parents are or what families we are born into; the genes we inherit; the colour of our eyes; the colour and texture of our hair; our nationalities at birth; the religions we are born into; and so many other apparently important factors or conditions which shape us into the people we become.
We do, however, get the chance to make choices, to make decisions, on a daily basis. Some internet sources estimate that the average adult makes around 35,000 remotely conscious decisions daily, with about 226.7 of those decisions relating to food alone. That is a lot of decisions for an activity that is, on average, performed two to four times daily.
For many of us, a lot of our trainings and education, whether in sciences, arts or humanities, have focused on helping us make good, better… optimal decisions. There are lots of published materials in libraries, on the internet, even in religious texts, that focus on helping us make “good” decisions.
All of these teachings will have us believe that that “the more good decisions we make, the better will be our habits, character… destiny”, leading us to the unrealistic expectation that good decisions should always lead to good outcomes. If this expectation is unrealistic, does it mean that good outcomes could result from bad decisions? How then do we determine what good decisions are?
Utpal Dholakia defined a good decision as “…one that is made deliberately and thoughtfully, considers and includes all relevant factors,…, and can be explained clearly to significant others”. This definition is consistent with some of my tweets this year about good decisions not always leading to good outcomes; about good outcomes from bad decisions being unsustainable and hard to repeat; and about how to deal with hindsight bias in the investment process.
For many of us, our education has not exposed us to the explicit realisation that good decisions sometimes lead to bad outcomes, and that bad decisions sometimes lead to good outcomes. While it may be difficult to clearly assess whether a decision is good or bad, it is imperative to recognise that the result / end does not always justify the means.
Bloomberg ran an article yesterday, about a 32-year-old man who invested all of his savings in Tesla and is now a millionaire. He started in 2017 with savings of around $10,000 and with little knowledge about investing. He directed all subsequent savings from his salary (after expenses) into buying more Tesla shares, ultimately putting around $90,000 into Tesla.
Tesla has grown by an unprecedented 730% this year alone, making many early investors with significant holdings rich. Whether Tesla’s current share price is representative of its intrinsic value, or whether its price is simply driven by the cult following that the Tesla brand itself as well as its founder, Elon Musk, have garnered over the last couple of years, is left to be seen. I touched on this briefly on an episode of the Smart Investing with Nosa Podcast.
However, without the benefit of hindsight, and on the assumption that capital markets (particularly US markets) are efficient, it is reasonable to expect that investing all of your savings in a volatile stock like Tesla is taking an unreasonable amount of risk. In this case, that unreasonable amount of risk has paid off and rewarded many investors handsomely. Does this make it a good decision?
I have written (on this blog and on twitter) and spoken a lot (e.g., on this episode of my Podcast) about my preference / argument in favour of investing in broad-based index funds, instead of investing in individual securities. In an efficient market, investing all of your savings in a single stock, particularly one over which you do not have the ability to influence financial and operating decisions or economic outcomes, is not a good decision, no matter what the outcome is.
In a 2018 journal titled “Do Stocks Outperform Treasury bills?”, Hendrik Bessembinder, concluded that, based on return information from 1926 until 2016, only the best-performing 4% of all stocks listed on various stock exchanges in the US (NYSE, Amex and Nasdaq) accounted for the net gain (excess return) on stocks over treasury bills.
This means that, as an investor, you would have been better off investing in (and rolling forward your investment in) government-issued, short-term, risk-free securities (treasuries) from 1926 to 2016, than investing in 96% of the all companies listed in the US market during that time.
Amongst my many arguments against individual stock picking, this is by far my favourite, and it is supported by historical data.
Good decisions do not always lead to good outcomes, but in the long run, making good decisions consistently should lead to consistently good outcomes. Likewise, bad decisions sometimes lead to good outcomes, but these good outcomes are unsustainable, and will, over time, result in generally bad outcomes.