Think probabilistically. Investing is an activity where “you must constantly consider the probabilities of various outcomes.” This involves constantly striving to find where “the price for an asset misrepresents either the probabilities or the outcomes.”
Update your views effectively. “Most people prefer to maintain beliefs over time, even when facts reveal their beliefs to be wrong.”
Beware of behavioral biases. “Great investors are those who are generally less affected by cognitive bias than the general population.”
Know the difference between information and influence. “Investing is an inherently social exercise. As a result, prices can go from being a source of information to a source of influence.”
Focus on position sizing. Proper portfolio construction involves determining the best policy regarding what positions to take and the size of those positions.
Then read more. Mauboussin quotes Berkshire Hathaway’s Charlie Munger as saying, “In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time—none, zero.”
This article was republished with permission from Validea.