Financial Literacy

The “Critically Counterintuitive” Lessons of Investing

  • In order to grow your wealth, you may think you need to be very intelligent and highly analytical.
  • But, as Nicholas Vardy explains, some of the most critical lessons of investing are counterintuitive.

I’ve written before about mental models in investing.

Today, I want to introduce a particularly compelling set of models I call the “critical counterintuitive.”

The concept is critical because little else matters. It is counterintuitive because it reminds us that the world works in ways opposite to the way we think it does.

Once you understand what it is, the critical counterintuitive is everywhere you look.

The nice guy hardly ever gets the girl. The smartest kid in the class rarely changes the world. The hardest worker doesn’t make the most money.

The investment world is also chock-full of critically counterintuitive rules.

And understanding how you can apply them can spell the difference between making a fortune and ending up bankrupt.

No. 1: Don’t Confuse Luck With Smarts

The role of luck in investing is subtle.

Say you invest $10,000 into a stock. It’s a 10-bagger, and you now have $100,000. You may think it’s the best thing that could ever happen to you.
But here’s why you are wrong…

Your phenomenal success makes you cocky. You think you cracked the code of the markets. The next time around, you decide to bet big.

You bet your life savings on the next “can’t lose” investment.

Say you win this time as well. Your total is 10 times what it was before. You are now officially a millionaire. You calculate that if you repeat this only one more time, you’ll have $10 million in the bank.

This time, however, your luck runs out. Your investment flops.

Since you bet the farm, you did more than lose your shirt. You’re now deeply in debt. You are far worse off than when you started.

You’re also psychologically scarred.

You now focus on replicating your initial success.

You’ve learned your lesson. If you do it only one more time, you promise the powers that be that you’ll take all your chips off the table.

Call this the “curse of sudden wealth.”

And it does not matter whether it comes from a stock tip or a lottery win.

Psychologists have studied the phenomenon. It turns out up to 70% of lottery winners end up bankrupt.

As author and entrepreneur Jim Rohn observed, “If you win a million dollars, you’d best become a millionaire. Because then you get to keep the money.”

The lesson?

If you ever do bet big on a stock and make a lot of money, understand you were at least as lucky as you were smart.

No. 2: Your Analysis Is Irrelevant to Your Investment Success

Friedrich Nietzsche once observed, “Any explanation is better than none.”

I disagree with the great German philosopher.

In the investment world, no explanation for a price move is necessary. Nor is it relevant.

Today, we suffer from information overload. You have more information about the financial markets than George Soros did when he made $1 billion breaking the Bank of England in 1992.

Yet your investment returns have not improved a bit.

Successful investing is not about more or better information.

Not only can’t we predict the future… we can’t even agree on what happened in the past.

Was the global financial crisis a consequence of Fed Chair Alan Greenspan’s loose monetary policy? The misplaced faith in complex financial models? President Bill Clinton’s decree to Fannie Mae and Freddie Mac to lend to low-income borrowers?

Even 20/20 hindsight fails to offer a clear vision.

But wait, it gets even worse.

There were Cassandras who – like the original Cassandra in Greek mythology – got their analysis “right” by predicting the financial crisis of 2008.

Alas, very few translated their accurate insights into making money.

High-profile Cassandras promised to “crash-proof” their clients’ portfolios. In the end, they lost more money for their clients than they would have if they’d just stuck with a U.S. index fund.

And as it turned out, the Cassandras were less right than they claimed. Gold never hit $5,000 an ounce. The U.S. dollar didn’t collapse. Treasurys didn’t implode.

And it turned out the U.S. had the top-performing stock market in the decade following the financial crisis.

The lesson?

Successful investors admit their mistakes. They don’t argue with reality to prove that they are right.

As the world’s greatest speculator, George Soros, stated, “My system doesn’t work by making valid predictions. It works by allowing me to recognize when I am wrong.”

No. 3: Your “Intelligence” Is Your Biggest Handicap

Warren Buffett famously remarked that if you do have an IQ of 160, you should just “give away 30 points to somebody else.”

Why? Because “you don’t need a lot of brains to be in this business.”

I’d go even further. High intelligence is a handicap to successful investing.

Here’s why…

When you have a high IQ, you are used to being 100% correct. Your ego can’t take the possibility of being wrong.

You stick to your views, no matter what the market is telling you.

That’s why many Wall Street analysts make terrible managers. And why hedge fund managers who brag about their brains get their furniture taken away. (This happened to hedge fund manager Victor Niederhoffer.)

Consider this: If brains were the key to successful investing, Nobel Prize-winning business school professors would populate the Forbes 400.

Instead, a good chunk of the Forbes 400 consists of college dropouts from the places where these same professors teach. (Bill Gates and Mark Zuckerberg dropped out of Harvard. Sergey Brin, Larry Page and Elon Musk all dropped out of Stanford.)

These folks may be billionaires, but no Wall Street firm would ever give them a job. No top business school would offer them a professorship.

Successful investors think more like poker players.

They play the hand they are dealt. If they a get a good hand, they up their bets. If they get a bad hand, they fold.

As Henry Rosovsky, a former dean of Harvard University, observed, “Our A students become professors. Our B students go to law school. Our C students rule the world.”

After all, it was the C students who stayed up all night playing poker with Bill Gates.

Three Critically Counterintuitive Lessons

So how can you use these critically counterintuitive rules to improve your investment returns?

First, never risk too much on one idea. You may get lucky once. Maybe even twice. But your luck will run out. If you bet the farm and lose, you’re out of the game for good.

Second, don’t believe you have a unique insight into the market. Apply that thinking to your investments, and you will blow up. And that’s not a question of if but when.

Third, learn to think of your investments as a hand in a poker game. Up the ante when you are dealt a good hand. But also be prepared to throw in your cards – and to do it often.

And always keep in mind the advice of the market wizard Ed Seykota: “Some people are born smart. Some people are born lucky. Some people are smart enough to be born lucky.”

Here’s hoping that you were born lucky!

Good investing,


P.S. I’m happy to announce that I now have an Oxford Club Facebook page where I have started posting videos sharing my latest views on the current state of the markets.


An accomplished investment advisor and widely recognized expert on quantitative investing, global investing and exchange-traded funds, Nicholas has been a regular commentator on CNN International and Fox Business Network. He has also been cited in The Wall Street JournalFinancial TimesNewsweek, Fox Business News, CBS, MarketWatch, Yahoo Finance and MSN Money Central. Nicholas holds a bachelor’s and a master’s from Stanford University and a J.D. from Harvard Law School. It’s no wonder his groundbreaking content is published regularly in the free daily e-letter Liberty Through Wealth.

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