Investing is more about temperament; let's see yours

One of the most important lessons I have learned is that a valuation that is not backed up by a story is both soulless and untrustworthy and that we remember stories better than spreadsheets.
-Prof Aswath Damodaran

Some say real life is too short for reading stories. A lot of reports on esoteric cyclical companies, which no one would normally read about, tend to seem more like fiction than fact.


A lot of these reports fall into the TLDR (Too Long, Didn’t Read) pile. But what about the stories we tell ourselves? We have this amazing ability to create elaborate narratives for investments the we make, mainly because we want to believe in that version of the future.

That doesn’t mean it will happen exactly that way. Even though enough people may believe in that version of the future, it still may not happen. That’s the fun part of life. It’s also known as reality.

Some of the best investment ideas are very simple. They’re easy to understand, there is a tailwind for the sector or the company and the management is mentally & balance sheet wise geared to take advantage of it. That has nothing to do with what we tell ourselves about a company. We get countless brokerage reports or elaborate discussions on chat groups about some investment ideas. All that does is reinforce the public opinion. It doesn’t affect reality at all.

By the extent of our fervour, we tend to extend ourselves on the cliff of reason hoping we will not fall but float to the sky. But reality is like gravity. Unless we apply equal & opposite force, we won’t be able to float.

Metaphors aside, this post shouldn’t suffer the fate of TLDR. It is far better to invest with our eyes & ears wide open and common sense at full intensity to reduce investment mistakes.

Someone who has seen a couple of cycles in the market can spot spinning of a story. However, the false positives in this case are tough to identify.

Investing is more about temperament than just financial knowledge. When we are fully aware of what kind of an investor we are and what’s operationally possible in a business, the veil of story telling gets lifted to some extent. We start seeing things more clearly & the far-fetched stories start to sound a little funny.

Like this quote goes: “Life is a tragedy for those who feel but a comedy for those who think,” we may feel the sting of missing an opportunity from time to time, but we may also start seeing the fun in how expectations can momentarily drive value versus how performance drives value over the long term.