One of my favorite quotes from Charlie Munger (Trades, Portfolio) is, "Someone will always be getting richer faster than you. This is not a tragedy."
This quote isn't complicated or difficult to understand. It is a simple reminder that envy and jealousy are bad traits for investors to have. While it may look as if other investors are doing much better than you, as long as you are following your own rules and guidelines, there is no need to rush and take on additional risk to try to match the market.
The psychological biases of envy and jealousy are something Charlie Munger (Trades, Portfolio) has spoken and written about many times before. In his now famous speech at Harvard Law School in 1995, where he talked about the Psychology of Human Misjudgement, Munger highlighted "bias from envy/jealousy" as one of his 25 leading causes of human misjudgment.
This is what Munger had to say at the time:
"Well, envy/jealousy made, what, two out of the ten commandments? Those of you who have raised siblings you know about envy, or tried to run a law firm or investment bank or even a faculty? I’ve heard Warren say a half a dozen times, 'It’s not greed that drives the world, but envy.'”
"Here again, you go through the psychology survey courses, and you go to the index: envy/jealousy, 1,000-page book, it’s blank. There are some blind spots in academia, but it’s an enormously powerful thing, and it operates, to a considerable extent, oĂ‚Ân the subconscious level. Anybody who doesn’t understand it is taking oĂ‚Ân defects he shouldn’t have."
Trying to avoid envy and jealousy is difficult, particularly in the interconnected world we live in today. You don't have to spend long on the internet to see someone who has made millions from investing in a short period or wealthy individuals who have more money than they know what to do with. The pangs of jealousy most people feel when they see wealthy individuals can be enough to push them up the risk curve and take on more risks than they usually would -- which is never a good thing.
The problem with envy and jealousy is that it pushes you to do things that you may not be necessarily that comfortable with. Successful investing is all about developing and sticking to a repeatable strategy. The strategy will vary from investor to investor, depending on their level of experience, risk tolerance and circle of competence.
A circle of competence is not something that you develop overnight. It takes years of research and understanding to build out the knowledge of a particular sector or industry, which means that switching your investment focus from one sector to another overnight, just because one sector is performing better than another, is almost sure to end in failure. This is why Munger highlights jealousy and envy as two of the main causes of human misjudgment.
Jealousy and envy push people to take risks that they may not necessarily be comfortable with usually, and this means they don't have a plan for when things go wrong. It is particularly important for investors not to be misled by other investors' success because even a small investing setback can have significant repercussions over the long-term as the investors who chased the financial sector before the financial crisis found out to there expense in 2008/2009.
So, in summary, envy and jealousy are two psychological traits investors should seek to eliminate at all costs. It is just not worth making a mistake driven by envy for no tangible benefits, or a Munger put it:
“Envy is a really stupid sin because it’s the only one you could never possibly have any fun at. There’s a lot of pain and no fun. Why would you want to get on that trolley?”
Disclosure: The author owns shares in Berkshire Hathaway.
Read more here:Ă‚
Buffett on Diversification: There Are Not That Many Wonderful Companies Out There
Does Warren Buffett Have a Private Equity Problem?Ă‚
Molson Coors: Cheap But Not Cheap EnoughÂ
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