“Amateurs hope, professionals work.” – Garson Kanin
The other week I came across an article on what is quickly becoming my favorite blog entitled The Difference Between Amateurs and Professionals. It’s a short read and I encourage everyone to read through it at least once. The post outlines at least two dozen differences in the way amateurs versus professionals think and act. The author summarizes all these differences by boiling them down to the following statement: Amateurs believe that the world should work the way they want it to. Professionals realize that they have to work with the world as they find it.
This sentiment holds true for many areas of life including investing. We can’t even begin to count the number of times people have asked us “why is the stock market going up (or down) when X, Y, & Z are happening.” This sentiment reflects the amateur view that the world should work the way we want it to as opposed to the professional view that we must accept the world as we find it and adjust our thinking accordingly.
In this week’s post we are going to highlight some of the key differences between amateurs and professionals from the Farnam Street blog post by pulling snippets from some of our previous Insights on these exact topics.
1) Amateurs have a goal. Professionals have a process.
[W]e spend so much time on this blog and in face to face meetings with our clients unpacking and explaining our process as well as the results. In order to judge the efficacy of an investment strategy, we must take the time to fully understand the process rather than only considering the outcomes.
Thinking process over outcomes is one of those simple, yet difficult pieces of advice that is useful in many areas of your life. It’s difficult because we’re so obsessed keeping score and thinking in binary right or wrong terms. Since luck and randomness play such a large role in a complex world it’s more important to distinguish between good or bad decisions not being right or wrong every single time.
2) Amateurs think they are good at everything. Professionals understand their circles of competence.
- Real knowledge is to know the extent of one’s ignorance – Confucius
- I know that I know nothing – Socrates
- [He] who knows nothing is closer to the truth than he whose mind is filled with falsehoods and errors. – Thomas Jefferson
- The doorstep to the temple of wisdom is a knowledge of our own ignorance. – Benjamin Franklin
We are not afraid to admit we don’t know what the future holds or where the stock market is headed next. But this may not be a bad thing…"Stumbling through all our cognitive clutter just to recognize a true 'I don’t know' may not constitute failure as much as it does an enviable success, a crucial signpost that shows us we are traveling in the right direction toward the truth."
3) Amateurs think good outcomes are the result of their brilliance. Professionals understand when good outcomes are the result of luck.
Investment success isn’t just a question of whether the investor put together the “right” portfolio, but also whether it encountered a beneficial environment. Thus being successful requires a significant degree of luck. No one gets it right every time. But the skillful investor is right more often, over a long period of time, than an assumption of randomness would permit.
It’s hard to discuss skill in a particular activity without recognizing the role of luck…So here’s the distinction between activities in which luck plays a small role and activities in which luck plays a large role: when luck has little influence, a good process will always have a good outcome. When a measure of luck is involved, a good process will have a good outcome but only over time. When skill exerts the greater influence, cause and effect are intimately connected. When luck exerts the greater influence, cause and effect are only loosely linked in the short run.
4) Amateurs focus on the short term. Professionals focus on the long term.
There are lots of highly successful and extremely rich investors who were simply in the right place at the right time and there are probably even more (we don’t know for sure because media outlets don’t cover these stories) unsuccessful ones who have a sound process in place but have been “unlucky” with their outcomes. Now I’m not saying that outcomes don’t matter as the goal of investing is to make money, but what I am proposing is that over short periods of time comparing the returns of investment strategies A through Z is not proof positive of one’s superiority over the others. The shorter the time frame, the more luck/noise can play a huge roll in the outcomes/returns.
One of the shortfalls of financial theory is that it assumes humans can apply such principles with unwavering discipline. It assumes methodical behavior rooted in rationality and a long-term perspective, and it discounts the fact that often times what is the most optimal long-term decision can be hard to live with in the short-term.
None of us lives in the long term. We all, to our perpetual discomfort, live in the present, in what we call the zone of anxiety where we are always buffeted – financial and emotionally – by short-term uncertainty.
5) Amateurs think in absolutes. Professionals think in probabilities.
You should never be that certain about your own beliefs—the world just doesn't work that way. You have to be more adaptive, you have to be more reactive. You have to think probabilistically rather than in terms of certainties. It's not that you are always going to be right, because you are going to make mistakes no matter what, but you might be less inclined to make catastrophically bad mistakes.
[T]he solution is to view the future and uncertainty through a spectrum of potential outcomes rather than a single absolute. Just because something has been a certain way for the last X number of years, doesn’t mean that it will continue to be so forever and ever amen.
[I]f you combine a mix of uncorrelated investments together that don’t all rise and fall together, you end up improving your risk adjusted returns while also increasing the probability that you will stick to your investment discipline during times of crisis in any one particular asset class (stocks probably being the most significant one).
We obviously are firm supporters of the five concepts outlined above. These concepts are somewhat abstract to most novice investors, which is why we take time every week to write these posts and educate our clients. That being said, we cherry picked these five differences from a list of over two dozen, which means there is still plenty of room for improvement in our own approach investing. There is an old adage in the investment community that “hope is not an investment strategy.” As the opening quote indicates, many amateur investors have nothing more than hope. But the more we train our mind to think like a professional, the closer we will get to having a long-term sustainable investment process.
Author Elliott Orsillo, CFA is a founding member of Season Investments and serves on the investment committee overseeing the management of client assets. He spent nearly ten years as a financial analyst and portfolio manager working primarily with institutional clients prior to co-founding Season Investments. Elliott earned a bachelor's degree in Engineering from Oral Roberts University and a master's degree from Stanford University in Management Science & Engineering with an emphasis in Finance. Elliott and his wife Gigi have three children and like to spend their time outdoors enjoying everything the great state of Colorado has to offer.
Transparency is one of the defining characteristics of our firm. As such, it is our goal to communicate with our clients frequently and in a straightforward way about what we are doing in their portfolios and why. This information is not to be construed as an offer to sell or the solicitation of an offer to buy any securities. It represents only the opinions of Season Investments. Any views expressed are provided for informational purposes only and should not be construed as an offer, an endorsement, or inducement to invest.