Observations in public equity investing psychology
Could we give up control already?
Short term vs. Long term
I was browsing substacks for the first time in a while and was quickly recommended a few accounts within investing theme that have garnered respectable number of followers and impressive intros about how much returns their recommendations have generated since 2024. To get rich quick seems popular. That’s the reality of the market today, fast quarterly or even monthly returns are praised, the old school patience and long term seem boring.
While there is no right or wrong with either investment horizon, or any right or wrong with investment philosophies as long as it sustainably generates positive alpha for the clients, it does get me to think why short-term thinking is so prevalent and enticing. After all, we’ve all heard of the power of compounding and let the best companies work for us.
1. People want control, Wall Street wants control more
I think at the core of it is human’s urge to seek control of what’s uncontrollably. That’s why the market hates uncertainty. Uncertainty is not controllable. Within Wall Street (not all, but many), the ego to be right, the need for approval, the adrenaline to chase the win breed short-termism.
Take Nvidia, for example. It’s uncomfortable to imagine how AI will eventually drive significant productivity gain for societies while juggling the path to get there. Despite all the hype, OpenAI is only generating $10 billion annualized recurring revenue while planning to burn $28 billion this year still. Their value-add to their 700 million weekly active users are real, but the business model itself is more than proven. Who knows if they will become the casualty of the eventual AI adoption. To grapple with uncertainty by creating illusion of control, Wall Street looks to TSMC CoWoS numbers (which tells how much planned orders Nvidia is placing with TSMC to make their chips), or monthly server shipments outside of Taiwan, as if those one additional quarterly or annual data point will help predict the curve of next 3, 5 or 10 years.
The reality is, any number of factor can derail those near-term data. For example, there were supply chain issues with Taiwanese server makers early in the year that temporarily delayed shipment. Or if any unforeseen macro environment such as untamed inflation were to occur, capital markets will be pressured due to tightening rate environment. All of that may derail the AI ramp temporarily and none of it can be predicted by how much CoWoS Nvidia placed this year or how many servers were shipped out of Taiwan last months.
In fact, even cross-reads can be dangerous. Wall Street listens to TSMC for broader industry color, SK Hynix, the Korean memory maker, for their HBM sales as a way to triangulate Nvidia sales. These cross-reads tend to be part of self-reinforcing bull-whip effects that perpetuates confirmation bias.
Why extrapolate when life is inherently non-linear? Because it feels good to be in control. Without a framework to understand things, however imperfectly. Without a model to estimate sales, however inaccurate. It feels deeply unsettling.
To keep two opposing views in mind at the same time that AI will create enormous productivity gain for human and society in the long run and there can be near-to-medium term bubble is painful. Who cares if these near term data is noise as long as it can soothe my pain?
2. Long term growth investing requires humility
It feels reassuring that the traits that make us decent human beings equally apply to make us good investors. To spot the best growth opportunities over the long term requires the focus of possibilities over probabilities. And to do that, it requires surrender of control, namely, humility. Long term growth investing requires imagine what could go right, while stay intellectually honest with the reality and potential downside.
This is not to say rigorous analysis is useless or we can just be lazy about our assumptions. But it is to say even the best minds can’t predict the future often. As the investment industry famously put it, if we can be right 55% of the time (I would add ‘expected value weighted’), then we consider ourselves great investors. In fact, surrendering control is the best way to stay intellectually honest which improves our chance, because without control, we also removes ego to be right and the neediness for approval, all the emotional factors that hinders sound decision making.
3. Human factor as an edge
A common client question when they due diligence investment manager is ‘What is your edge?’. How do you answer that? After all, for public equity investing, the definition of a good company is not subject to much controversy. The definition of a good investment varies by style but are usually defined by two dimensions: investment horizon and valuation. If we overlay momentum / non-momentum, it largely defines the styles out there. How differentiated can one manager be versus another?
I tends to think it comes down to the human factor. As culture and management team are paramount to good long term investment opportunities, so are emotional intelligence to a good investor. EQ is not about being nice or friendly, but ability to act anti-human nature. Human craves control, fears failure and rejection, and follows least path of resistance. Investing, however, requires following a working investment philosophy consistently over time. Doing the good obvious consistently over a long time, across market conditions, through greed and fear, is anti-human nature.
Macro conditions can differ, technology innovations vary but human nature, reassuringly, don’t change much. That may be the only source of sustainable edge.
4. It’s all about self-awareness
At the end of the day, it is all about self-awareness. To understand oneself, truly, requires uncomfortable introspection. It means look into our defenses, vulnerabilities, and often times requires external support to make us become conscious of our subconscious. It’s painful but like Ray Dalio often say ‘face the pain’. Truth requires courage. By understanding ourselves, we achieve intellectual and emotional freedom that is first and foremost make us more aligned personally and better investors (or other professionals) at work.
5. Conclusion
Being a long-term investor offers enormous amount of intellectual joy to understand the world and learning about businesses from first principles. Surrendering control and learning to hold uncertainty allow intellectual freedom and spotting best growth opportunities by focusing on possibilities over probabilities. But in the end, it is the clients’ trust and alignment at the core that enables any of the positive flywheel, so if we happen to have the support of such investor base, be grateful and cherish it. I wish we each find fulfilling selves on our journey into greater self-awareness.