Over the past few years it became clear to me that the basis for all intelligent investing is to cultivate three important virtues: temperance, courage and worldly wisdom.
Temperance: defined as moderation in action, thought or feeling; restraint; self control
Courage: defined as mental or moral strength to venture, persevere, and withstand danger, fear, or difficulty.
Wordly Wisdom: (as defined by Charlie Munger) Learning the big ideas that underlie reality and developing certain thinking habits (mental models) derived through multidisciplinary reading and learning.
Successful investing is often not about the degree of intelligence but about the right emotional make-up and habits. Acquiring technical and specialized knowledge is not enough we also have to cultivate virtuous behavior and adapt to the true nature of the world since it will not adapt to us. We also have to recognize and accept the complexities of the world, especially the aspects we do not like.
How to do it?
It all starts and ends with habits. Due to our evolutionary development humans in their natural state are not by default virtuous as required in today's complex environment. After accounting for our natural state at birth we are essentially a product of the habits we cultivate throughout our lives. It follows that if we want to change something we have to focus on our habits and behavioral change. Let's look at the definition of habits as found on Wikipedia:
"A habit (or wont) is a routine of behavior that is repeated regularly and tends to occur subconsciously. In the American Journal of Psychology it is defined in this way: "A habit, from the standpoint of psychology, is a more or less fixed way of thinking, willing, or feeling acquired through previous repetition of a mental experience." Habitual behavior often goes unnoticed in persons exhibiting it, because a person does not need to engage in self-analysis when undertaking routine tasks. Habits are sometimes compulsory. The process by which new behaviors become automatic is habit formation. Old habits are hard to break and new habits are hard to form because the behavioural patterns we repeat are imprinted in our neural pathways, but it is possible to form new habits through repetition"
In order to get a better understandings of the workings and laws of habit I turn to William James (1842-1910), one of the most influential philosophers the United States has ever produced and associated with the philosophical schools known as pragmatism and functional psychology.
The Laws of Habit
Living creatures are bundles of habit. In the case of wild animals the usual round of daily behavior seems to be a necessity for survival implanted at birth. Those habits with an innate tendency are called instincts. For domesticated animals and humans on the other hand, habits are to a great extend the result of education and can also be called acts of reason. Habits cover a large part of our lives and usually take periods of time to be adopted.
The tendency to adopt habits slowly over time can be described by term called plasticity which is the possession of a structure weak enough to yield to an influence but strong enough not to yield all at once. Each relatively stable phase of equilibrium in such a structure is marked by what we may call a new set of habits. Organic matter , especially nervous tissue, seems endowed with an extraordinary degree of plasticity of this sort. As such the phenomenon of habit in living beings are due to the plasticity of the organic materials of which their bodies are composed. This also means that habits are at bottom a physical rather than a psychological principle. Like a garment, after having been worn a certain time, clings to the body better than when it was new; there has been a change in the tissue, and this change is a new habit of cohesion. Similarly, a napkin folds easier when it was already folded before or a sprained ankle is in danger of being sprained again. The overcoming of resistance is a phenomenon of habituation, in a good and a bad way. If we ascend to the nervous system, many so-called functional diseases seem to keep themselves going simply because they happen to have once begun (e.g. insomnia). Or more obvious habits such as unhealthy indulgence of passion or just complaining or irascible disposition are merely due to the simple inertia of the nervous organs, when once launched on a false career. This can be proven by the success with which a "weaning" treatment can often be applied through the closing of the chain of reflexive arcs in the nervous system which are impressions produced by one muscular contraction serving as a stimulus to provoke the next. Thankfully, there is no part of the organism of man in which the reconstructive activity is so great, during the whole period of life, as in the ganglionic substance of the brain, indicated by the enormous supply of blood which it receives. Since any formative activity is will be easiest during a period of growth and development (e.g. children learn any sport or instrument much easier than adults) the extreme regenerative ability of the brain during all periods of our lives makes it very susceptible to learning new habits. Any sequence of mental action which has been frequently repeated tends to perpetuate itself, so that we find ourselves automatically be prompted to think, feel or do what we have been before accustomed to think, feel or do, under like circumstances, without any consciously formed purpose, or anticipation of results. The brain, like all parts of the organism, tends to form itself in accordance with the mode in which it is habitually exercised. This tendency will be especially strong in the nervous apparatus due its extraordinary and incessant regenerative abilities.
Practical implications
1) Habit simplifies the movements required to achieve a given result, it makes it more accurate and diminishes fatigue. But the easier a movement occurs, the slighter is the stimulus required to set it up. Man would be in a sorry plight if practice did not make perfect, nor habit economize the expense of nervous and muscular energy. If an act became no easier after done several times, if the careful direction of consciousness were necessary to its accomplishments on each occasion, it is evident that the whole activity of a lifetime might be confined to one or two deeds - that no progress could take place in development. A man might be occupied all day in dressing and undressing himself; the attitude of his body would take all his attention and energy; the washing of his hands or the fastening of a button would be as difficult to him on each occasion as to the child on its first trial.
2) Habit diminishes the conscious attention with which our actions are performed. When we are proficient, results not only follow with minimum muscular action but also follow from a single instantaneous cue. The marksman sees the bird, and, before he knows it, he has aimed and shot. When somebody says A,B we immediately rattle down A,B,C,D,E,F,G, .....And not only is it the right thing at the right time that we thus involuntarily do, but the wrong thing also, if it be an habitual thing. All of us have a definite routine manner of performing certain daily tasks connected with the toilet, with the opening and shutting of familiar cupboards, and the likes. We don't remember how our door swings or which socks we put on first. We cannot tell the answer but our hand never makes a mistake. Our lower centers knows the order of these movements and shows surprise if they are altered. Our higher thought center knows hardly anything about these matters as these actions are not consciously performed. When we perform this tasks our attention is usually far away.
The period below twenty years old is important for fixing personal habits, such as vocalization and pronunciation, gesture, motion and address. The greatest thing in education then is to make automatic and habitual, as early as possible, as many useful actions as you can. The period between twenty and thirty is critical for the formation of intellectual and professional habits. The more of the details of our daily life we can hand over to the infallible and effortless custody of automatism, the more our higher powers of mind will be set free for their own proper work. There are three maxims to treat habits:
In the acquisition of a new habit, or the leaving off of an old one, we must take care to launch ourselves with as strong and decided an initiative as possible. Accumulate all the possible circumstances which shall re-enforce the right motives; put yourself assiduously in conditions that encourage the new way; make engagements incompatible with the old; take a public pledge, if the case allows; in short envelop your resolution with every aid you know. This will give your knew beginning such a momentum that the temptation to break down will not occur as soon as it otherwise might; and every day during which a breakdown is postponed adds to the chances of its not occurring at all.
Never suffer an exception to occur until the new habit is securely rooted in your life. Each lapse is like the letting fall of a ball of sting which one is carefully winding up; a single slip undoes more than a great many turns will wind again. Continuity of training is the great means of making the nervous system act infallibly right.
All expert opinion would agree that abrupt acquisition of the new habit is the best way, if there be a real possibility of carrying it out. We must be careful not to give the will so stiff a task as to insure its defeat at the very outset. A sharp period of suffering is the best thing to aim at. It is surprising how soon a desire will die of lack of mental enthusiasm if it be never fed. One must first learn, unmoved, looking neither to the right nor left, to walk firmly on the straight and narrow path, before one can begin to make one's self over again. He who every day makes a fresh resolve is like one who, arriving at the edge of the ditch he is to leap, forever stops and returns for a fresh run. Without unbroken advance, there is no such thing as accumulation of the ethical forces possible, and to make this possible, and to exercise us and habituate us in it is the sovereign blessing of regular work.
Seize the very first possible opportunity to act on every resolution you make, and on every emotional prompting you may experience in the direction of the habits you aspire to gain. It is not in the moment of their forming, but in the moment of their producing motor effects, that resolves and aspirations communicate the new "set" to the brain. Practical opportunity provides the fulcrum upon which the lever can rest and by which strength will be multiplied. He who has no solid ground to press against, will never get beyond the stage of empty gesture-making. No matter how full the reservoir of maxims one may possess, and no matter how good one's sentiments may be, if one have not taken advantage of every concrete opportunity to act, one's character may remain entirely unaffected for the better. With mere good intentions, hell is proverbially paved. A tendency to act only becomes effectively ingrained in us in proportion to the uninterrupted frequency with which the actions actually occur, and the brain "grows" to their use. Every time a resolve or a fine glow of feeling evaporates without bearing practical fruit, is worse than a chance lost; it works so as positively to hinder future resolutions and emotions from taking the normal path of discharge. There is no more contemptible type of human character than that of the nerveless sentimentalist and dreamer, who spends his life in a weltering sea of sensibility and emotions, but who never does a manly concrete deed. If we often flinch from making an effort, before we know it the effort making capacity will be gone; and that, if we suffer the wandering of our attention, presently it will wander all the time. Attention and effort are but two names for the same psychic fact. They also seem to some degree subject to the law of habit. Keep the faculty of effort alive in you by a little gratuitous exercise every day. That is, be systematically ascetic or heroic in little unnecessary points, do every day or two something for no other reason than that you would rather not do it, so that when the hour of dire need draws nigh, it may find you no unarmed and untrained to stand the test.
We make hell for ourselves in this world by habitually fashioning our characters in the wrong way. Could the young but realize how soon they will become mere walking bundles of habits, they would give more heed to their conduct while in the plastic state. We are spinning our own fates, good or evil, and never to be undone. Every small stroke of virtue or of vice leaves its never so little scar. The drunken Rib Van Winkle, in Jefferson's play, excuses himself for every fresh dereliction by saying. "It won't count this time!" He may not count it, and a kind Heaven may not count it; but it is being counted none the less. Down among his fibers the molecules are counting it, registering and storing it up to be used against him when the next temptation comes. Nothing we ever do is, in strict scientific literalness, wiped out. Of course, this has its good side as well as its bad one. As we become permanent drunkards by so many separate drinks, so we become saints in the moral, and authorities and experts in the practical and scientific spheres, by so many separate acts and hours of work.
