Thou Shalt Not Covet Thy Neighbor’s Returns

Source: Wikipedia

The most important investing commandment is this: thou shalt not covet thy neighbor’s returns. If there is one thing you absolutely do not do in investing under any circumstances, it is make decisions based on whether other people are making more money than you. This is akin to playing poker on a tilt and should be viewed as a cardinal sin. For those unfamiliar with poker terminology:

Tilt is a poker term for a state of mental or emotional confusion or frustration in which a player adopts a less than optimal strategy, usually resulting in the player becoming over-aggressive. This term is closely associated with “steam” and some consider the terms equivalent, although steam typically carries more anger and intensity.

Placing an opponent on tilt or dealing with being on tilt oneself is an important aspect of poker. It is a relatively frequent occurrence due to frustration, animosity against other players, or simply bad luck. Experienced players recommend learning to recognize that one is experiencing tilt and avoid allowing it to influence one’s play.

People invest on tilts all the time. Most commonly this happens when a particular asset or asset class prints an extraordinary return in a short period of time (*ahem* cryptocurrency). Investors see all the people who made money in that asset or asset class lionized in the media. These people are lauded as geniuses. Some join the pantheon of “legendary investors.”

Meanwhile, the people who didn’t make money are frustrated. They are jealous. They missed out on monster gains and are afraid of missing out on further gains. Their  emotions are further addled by the fact that some of the newly minted “legendary investors” are invariably young and/or unsophisticated. So instead of thinking critically about valuations or the timeless truth of mean reversion new investors pile into the hot asset.

If they are good at timing momentum (or just lucky) these investors might make a decent chunk of money. But often they pile in at exactly the wrong time—at the peak of enthusiasm for the hot asset. Beyond them there is no marginal buyer and so there is nothing left for the price to do except gap down. Left unchecked this behavior can wreak real havoc on a person’s net worth over time.

Another, far less common manifestation of an investing tilt is the fanatical short bet. This has killed Bill Ackman in Herbalife (I will not recount that saga here). It has also afflicted David Einhorn in Tesla. Dealbreaker writes:

Pitting Einhorn’s frigidly data-driven and Alpha-focused brain against the Church of Elon that is Tesla is inherently hilarious. Tesla stock is essentially impervious to the company’s failures. Neither analysts nor investors hold Elon Musk to his own guidance, Tesla doesn’t deliver on anything its promised, the stock doesn’t drop, and then Einhorn points his fingers and goes apeshit wondering how this isn’t working out as the greatest short position in the history of trading.

See, we’ve been warning everyone that Tesla should be valued as a religion and not as a car company. You can’t look at Tesla’s balance sheet and discern meaning anymore than you can consult The Book of Leviticus for mortgage advice. But this has not yet fully dawned on poor, numbers addict David Einhorn. And it is growing clear that his trade against Tesla is entering a dangerous early stage of what we call “Ackmania.”

As we’ve seen play out over an agonizingly long time with Bill Ackman and Herbalife, hedge fund managers can sometimes fall into a dark corner of their own souls where a short position metastasizes into a true hatred, and the stock becomes a reliquary for all that is wrong with not just the market, but the world at large. It is a form of self-harm that saps you of your energy and steals your reputation. It also allows rivals to torture you from afar.

Of course, there are also holistic benefits to not coveting others’ returns. Life is short. Why waste time and energy resenting people who have had success in the markets?


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