June 2025
IN THIS ISSUE
Cathie Wood hit four home runs
Playing defense is losing
Novice indexers vs Novice stock-pickers
Focus LESS on the negative?!!
In the wake of Warren Buffett’s recent retirement announcement, folks have been reflecting on his life’s impact and investment approach. This article particularly caught my attention: Warren Buffett Says You’re Too Focused on the Negative. Here’s the Neuroscience Showing He’s Right.
The human mind has evolved to prioritize bad news. When Early Humans heard a rustle in the bushes, those who ran survived longer than those who discounted that signal - whether there was a hungry tiger in those bushes or just a squirrel.
In investment management it is absolutely essential to manage risk of course, which I define as the Likelyhood of a permanent loss of capital. Successfully navigating market volatility requires first ensuring solvency and avoiding the risk of ruin. But taken too far, an overemphasis on negative outcomes leads investors to excessive hedging and even shorting, a strategy which has a long history of underperformance (In 2023, pessimism was expensive (again) - Likelyhoods, Dec 2023).
As we have established repeatedly, pessimism is expensive and shorting is a tough way to make a buck. When investors overestimate the probability of crashes, or overweight negative personal experiences, they risk missing out on the market returns that consistent participation offers. Investors who panic-sell during market downturns frequently forfeit wealth because they miss the market's best days, which historically occur very soon after the worst days.
(past performance is not necessarily indicative of future results of course)
This deep-seated human bias toward negativity and risk aversion requires conscious compensation, a concept recently articulated by Jeff Bezos (Inc):
“I think it’s generally human nature to overestimate risk and underestimate opportunity,” Bezos replied. “The risks are probably not as big as you perceive and the opportunities may be bigger than you perceive.”
What looks like confidence, he continues, is simply applied knowledge of this reality. “You say it’s confidence, but maybe it’s just accepting that’s a human bias and trying to compensate against it,” he says.
Compensating against this bias, including evidence-based thoughtfulness in properly evaluating negative risk factors, is at the heart of what I call Thinking in Likelyhoods.
ONE MORE THING…
Cathie Wood hit four home runs. Stock pickers take chances on home runs (concentration risk) to outperform. Some will occasionally hit home runs - like Cathie Wood has so far this year. This does not mean the process will outperform long term however. Cathie Wood On Top Again Due To 4 'Home Run' Stocks
Playing defense is losing. “In finance, when you’re playing defense, you’re almost certainly losing,” Griffin said to Citadel’s new class of summer interns Thursday evening. “There’s no other way to put it. Every time a portfolio manager tells me ‘I’m going on defense,’ I’m waiting to watch the red because that tends to be what happens next.” Citadel's Ken Griffin says playing defense almost always guarantees losses even in turbulent times
Novice indexers vs Novice stock-pickers. Ken Griffin believes that novice investors will not beat the Pros. I agree with him for novice stock-pickers… but the evidence is against Griffin for Novice indexers.
The information and opinions contained in this newsletter are for background and informational/educational purposes only. The information herein is not personalized investment advice nor an investment recommendation on the part of Likely Capital Management, LLC (“Likely Capital”). No portion of the commentary included herein is to be construed as an offer or a solicitation to effect any transaction in securities. No representation, warranty, or undertaking, express or implied, is given as to the accuracy or completeness of the information or opinions contained herein, and no liability is accepted as to the accuracy or completeness of any such information or opinions.
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