Are You Any Good at This?

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Jason’s Random Words

I've been thinking a lot more about Ken's question from this week's podcast episode: "How do you know you're good at this?"

I'm not sure that I gave a very good answer when Jeff and I discussed it. In part because it's probably a harder question to answer than it seems. The obvious answer is, how are you doing against your benchmark? If you're beating it then you're good, right? 

Ken used this in his own question, pointing out that his stock portfolio has – in his words, a small sample size of two years – outperformed the market, but still says he doesn't "consider myself good yet." 

Here's the thing. Even the best investors don't always beat the benchmark. I've written and talked about how Coca-Cola (KO) has been a market-underperforming stock since at least 1994, when Berkshire Hathaway (BRK.A)(BRK.B) completed its investment in the company. The S&P 500 has earned about 900% more in total returns over that period. It's not even close. 

Here's another stunning number. Starting in 2008, Berkshire Hathaway underperformed the S&P 500 in every rolling 10-year period until 2013, when the 2022 bear market pushed the S&P backwards enough for Berkshire to catch up. Since 2014, Berkshire has basically been a market-performer; there are only a handful of starting points since 2007 where Berkshire is actually a better investment than the market.

So I ask, is Warren Buffett still one of the greatest investors of all time? Is he even still any good? If I told you that Berkshire stock has returned to outperformance in recent short-term periods, would that change your answer?

Or has he become the proverbial washed-up athlete who’s a shadow of their former, younger self, but still manages to show flashes of their elite skill on occasion?

What if I reminded you that Buffett himself has cautioned investors that Berkshire may struggle to outperform the market during strong bull runs? We've certainly had that for most of the past 15 years. 

A complex question we’re trying to answer. And introspection is very different (and more important) than arguing over our favorite financial athletes.

The point is, the numbers only tell us part of the answer. It's an incredibly important part (it's why we do this, after all) but keeping a level head, and not swinging too much towards reckless confidence or wealth-limiting caution is probably what we should focus on the most when evaluating our own skill. 

I think that humility is a good place for Ken (and the rest of us) to start, and to stay. Overconfidence, I believe, is one of the two most value-destructive behaviors we can adopt. A little fast success is almost certainly luck-driven as much as talent, but when we let ourselves believe we are perfect stock pickers, we give greed the wheel. And that path often leads to wealth destruction. 

A few thoughts about building an "am I any good at this" framework:

• What are you benchmarking yourself against?

  • Is this a reasonable benchmark?

  • Are you benchmarking yourself against your financial goals, too? Or just "the market"?

• Remember that being good at picking stocks isn't the same as being a good investor.

  • Even "good" stock picks crashed in 2000 and 2008 and 2020 and 2022. Some took years to recover. 

• If you're not doing better than your benchmark or falling short of your goals, do you know why?

  • What are you doing about it? (The best answer may be "nothing different.")

• If you are doing better than your benchmark, do you know why?

  • Stocks you researched and picked?

  • Borrowed (or bought) conviction?

  • Pure luck or good timing?

The answer is rarely binary, and that nuance is part of the struggle with this question. Nvidia alone hits on multiple answers. Anyone who sold it a year ago or actively chose to not own it is a “bad” investor. Anyone who bought it and held over the past few years is both “good” and “lucky.” The point is, being as objective and honest with yourself is the only way to learn what you’re good at, and fix what you’re bad at. It’s also pretty hard to be objective and honest with ourselves sometimes.

Here is my one hard truth on this topic: If you're consistently and meaningfully doing worse than the benchmark, you're making it harder to reach the most important benchmark: your personal financial goals. 

We invest, in the end, to make money. To create and preserve wealth. Every action you take should do one of two things, or ideally both:

• Move you closer to your financial goals. 

• Teach you a lesson to improve your outcomes. 

In other words, your wins should grow your wealth and teach you something, while your mistakes should teach you something that helps grow your wealth. If you’re winning, you’re becoming a better investor. If you’re learning, same.

You can do it. I believe in you.

Jason