Trite Munger quotes that hit me, FY23 edition: slaying the envy dragon (and annual fintwit returns)
Charlie Munger passed away late last year. To put it simply, his passing made me sad; I had an enormous amount of respect for him and learned a ton from him. His 100th birthday would have been January 1st, and I found myself thinking a lot about Charlie on his birthday / over the past week.
Why? In what has become an occasionally* annual fintwit tradition, last weekend saw “everyone” post their 2023 portfolio returns.
The reason I was thinking about Charlie while everyone was posting their annual returns is because he spent a lot of time talking about the perils of envy. Per Charlie,
I think envy is one of the major problems of the human condition, and that’s why it figured so prominently in the laws of Moses. Remember, he said you couldn’t even covet your neighbor’s donkey
That’s good stuff, though I actually like the related Russian proverb a bit more
“There is an old Russian story where a farmer finds a magic lamp. He rubs it, and a genie appears who promises to grant him one wish. The farmer thinks for a moment then says: ‘My neighbor has a cow. I don’t have a cow. I wish my neighbor’s cow dead.’”- Peter Bevelin
The learning from those quotes that hit me is both trite and a little personal, but it’s this: the times in my life where I have performed the worst (on both a professional and personal level) have generally been when I’ve let envy rule. If you want to be an better investor / portfolio manager, you need to slay that envy dragon. Whether you were up 3% or 30% last year (or down 20%!), don’t let envying someone doing better than you poison your mindset; it will only lead to worse returns / investing going forward.
Again, this is just my own history, but on a professional level, I’ve performed the worst when I’ve had “everyone is getting rich but me” envy. If everyone else seems to be doing well and smashing with the market with ease while I’m merely doing alright or even struggling, then I’m more likely to press: take silly risks, buy things without thinking through them fully, make investments that I normally wouldn’t make, etc. Why? Because everyone else is doing well, and (either subconsciously or consciously) I’m trying to keep up with them (or pass them!)! (A similar thing applies on a personal level: I don’t regret tons of stuff in my life, but with hindsight what I do regret I generally did because someone had something I didn’t and I was envious…. but, as this is an investing blog and not a therapy session, I will leave it there!).
This “everyone else is getting risk” envy is even worse when I see people who I think I’m smarter than making more money than me. I’m not trying to judge or have a huge ego; I think most of my peers are incredible sharp. But there are a few people who stumble into my space who I think I’m obviously a better investor than, and it is really hard to not get envious when they post banner years. For example, one time I had an introductory call with an investor who pitched me an idea as a potential multibagger. I talked to him, and it turned out his whole thesis rested on his model….. which was using the wrong share count. To simplify, he was using 5 shares outstanding, and there were actually 50. If you used the right share count, his model (which implied 5x upside to the stock) would actually imply 50% downside. This was his largest position (I believe it was just over 20% of his book), and a few days after we talked, it got bought out for a >50% premium. Let’s just say it was not easy to tame the envy dragon when I saw his annual returns that year (note that I am slightly simplifying this story, but I’m honestly not simplifying it that much. And, on top of the obvious model error, the person made multiple fundamental errors in their analysis. I believe the acquisition resulted in a huge write down a few years down the line).
Anyway, here’s the thing: envy can happen even if you have a great year. If the index was up 10% and you were up 30%, it’s still really easy to be envious of people who are posting +50% years.
So if you’re seeing everyone bragging about posting 50% or 100% years last year and feeling envious, I’d advise….. not being envious.
Of course, easier said than done.
Here are some tricks I’ve learned (through a lot of pain and frustration over the years) to help with “return envy”.
Try to remind yourself that you’re playing the long game. Outperformance is generally built in down markets, not up markets. And outperformance is built over years and decades, not a few months or a single year. The tortoise beats the hare and all that (and I do believe there is research that suggests the best performing funds over the long runs tend to be the ones that just consistently put up good years, not the ones that put up one smashing year as they generally put up a smashing year by taking on a ton of risk and turning out to be right in that one instance).
Remember that other investors returns have literally no bearing on your own. You could be up 100% this year and I could be up 80%. Guess what? We both did great. Try to be happy for people who are posting world beating returns (as the russian philosopher would say, don’t wish for your neighbor’s cow to die just because you don’t have one, though in the case of a +80% year I suppose the more apt metaphor would be don’t wish for your neighbor’s cow to die just because it’s a little bigger than your own quite enormous cow!).
This thought process touches a little on Buffet’s “inner scorecard” accounting, but I do think it’s possible to be very inner scorecard focused and still have to deal with / reduce envy.
Of course, #2 is very “zen”. Envy is very hard to dismiss with reason / logic like “I’m doing fantastic so I shouldn’t envy someone else doing fantastic squared”. So do remember that a lot of the really strong returns get posted by people who are taking wild risks or who are coming off a really low base. I had one friend email me about his +200% year in 2023. Good for him!!!!…. but given he was down >60% in 2022 (and didn’t email me that year!), he’s just getting back to about breakeven!
And look, just in writing that paragraph I realize that there’s a little envy / spite in that emotion / logic, so it’s something else I need to work on / think through internally.
You’ll note that a beginning of article I put an * behind “occasionally annual”. I did it for exactly this reason; I feel like I saw a lot more annual returns getting tweeted out in 2021 and 2023 (when markets were generally ripping) than in 2022 (when markets were pretty brutal).
Related, you’d be surprised how many people deliver world beating returns when their stuff really works, and then never have a good year again. Some investors are just perma-bullish commodities / always convinced hyper inflation is around the corner. Those investors probably posted world beating returns in 2022, but on a longer track record things probably don’t look so great. And these things can work in longer cycles: if you’ve been perma-bullish tech, you’ve probably seen incredible returns over the past decade. Good for you! But if the “tech tailwind” ever disappeared, I wonder how many of the people who rode the “magnificent 7” (or whatever we’re calling it these days) would continue to generate alpha. I suspect many (not all, but many) would substantially underperform the indices the moment they didn’t have the tailwind of the Nasdaq ripping 20%/year.
If you’re a superhuman, the above will work for you and your portfolio envy will be way down…. but, for me personally, I’m only human. I’m trying to reduce my envy but I’ve still got plenty, so I need to find a way to deal with it and not press / make stupid mistakes and silly bets when I have it. There are tons of ways to do this; obviously clearing your mind or doing something other than investing (stepping away from the screen or “touching grass” as I believe the kids say) will help…. but if investing is your job it’s hard to completely turn your mind off like that / unplug for that long. In terms of being able to continue to work while reducing envy, the best thing that I think you can do is to slow down / not make trades or investments in a hurry.
The best way I’ve found to slow down personally? Writing! I personally think I’ve gotten much better as an investor since I started putting serious time into the blog; part of that is because of some of the connections I’ve made….. but a large part of the improvement is writing helps me think clearly. When I write an idea down, I’ll often notice internal flaws in my reasoning. I can’t tell you how many times I’ve looked at a stock, thought it was a good idea, started to write it up…. and then paused and realized it was not a good idea, it was a risky idea and I was attracted to it because I was feeling bored, or envious, or wanted to juice my returns, and the process of putting the idea down to paper helped me identify what I was actually attracted to / skipping over.
Yes- my draft folders is filled with literally dozens of posts and ideas that I started to write / think about and ultimately decided didn’t make the cut.
So I’ll admit it: I know I said earlier this is an investing blog and not a therapy session, but you’re often reading my investing therapy sessions when I put up a new blog post.
My wife and I used to watch Billions quite a bit (we stopped after the COVID season). It was a really fun show (though I had some trouble watching it; the characters almost never spend time actually working and I would spend half the episode in an internal argument with myself debating if the show was taking creative license with how little they worked to keep things interesting or if there was a cadre of successful managers who were resting on their laurels and actually spend that little time working / that much time politicking. Given how online some high profile managers have become, I worry it’s the later). Anyway, one of the best characters on Billions is Wendy, who is the firm’s performance psychologist. I remember when I first started watching I thought the idea of a firm wide performance psychologist was a silly little show creation, but the longer I invest, the more I realize that trying to be a value investor is as much a psychological game as it is one of calculating P/E ratios, reading 10-Ks, and figuring out business models.
And, given how much of a psychological game it is, one of the biggest hacks to improving your investing is going to be slaying that envy dragon.