Too Much of a Good Thing?

Throughout history, the world has seen many innovations created to solve problems or improve the quality of peoples’ lives that have instead gone on to cause more harm than good. The phrase “too much of a good thing” has fitting applications in both life and investing. Morgan Housel outlines how philosophies and innovations that are seemingly positive can often be detrimental when overused or overapplied. For example, contrarianism is a philosophy that should be applied in specific instances, but some have adopted it as a rule for how they invest. In reality, the wisdom of the crowd points us in the right direction the majority of the time, and there are only small pockets of time where it pays off to go against it. Another philosophy that should be viewed cautiously is optimism. It has always been profitable over long periods of time to be optimistic about the progress of humankind, but irrational exuberance can lead to fragility of the system and major losses borne by those who ignore the risks. Finally, there is open-mindedness. While this is inherently a very good philosophy, being overly open-minded can lead to a contradiction-induced paralysis. Being able to update your worldview while taking in new information and filtering signals from noise is an incredibly useful skill as an investor. The important takeaway for investors is to avoid dogma in their philosophies. Life is never black and white – why should we expect investing to be any different?