It’s remarkable how ill-suited we advanced primates are to investing. We like to think we are smart and rational when it comes to managing money, but study after study has shown that we tend to buy after the market has gone up and sell when it has gone down.

Being social animals, it is extremely hard for us to be outside the herd. By definition, following the market is following the herd. While social proof can be beneficial in many other phases of life by keeping you from behaving like a deviant in one manner or another, it is the enemy of investing well, at least at extremes of valuation and crowd sentiment.

The investor’s chief problem – and even his worst enemy – is likely to be himself.
– Benjamin Graham

Don’t Trust Your Instincts

The reality is that contrary to the nostrums of the self-help movement, you can’t trust your emotional instincts when it comes to investing. You need to cultivate an intellectual outsider’s mentality and pair it with becoming comfortable zigging when your mood tells you to zag.

Most people can’t or won’t do this because of the difficulty of being different from the crowd.

When markets are happy, think about what could go wrong. When markets are in despair, think about what could go right. — Dennis Stattman

What If You Can’t Develop an Outsider’s Mentality?

If you can’t cultivate this outsider’s mindset, you either need a brain-dead-simple strategy where you commit to a certain asset allocation and rebalance when the percentages get out of whack, or you need an adviser who will talk you down off of the ledge before you sabotage yourself. This is one area where a good adviser can be worth his or her weight in gold.

The most important lesson in investing is humility.
– Sir John Templeton

Keep it Simple, Smartie

One of the lessons of military strategy is to attack where your opponent is the weakest. With so many smart people running money, you shouldn’t try to compete with their strengths. Short-term trading and very complex strategies are areas where it is going to be very hard to get an edge on all of the other smart guys out there.

Don’t try to out-clever all of the CFAs and hedge fund guys. Since most of the pros are focused on the short-term, the individual investor should focus on lengthening their time horizon and being patient. Simple strategies that you are committed to in good times and bad will work over time.

It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.
– Charlie Munger