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Investment decision making - Ten advantages everyday investors have over professionals (Link)
If we think about some of the main challenges encountered by investors around issues such as time horizons, over-trading, overconfidence, misaligned incentives and benchmark obsession, these problems are often exacerbated when investing in a professional context. Everyday investors are not immune from these behavioural issues that lead to poor investment decision making but it is important to acknowledge that the investment industry has certain structural features that serve to inflame a particular set of behavioural shortcomings. Many of these structural shortcomings are much harder to avoid when investing in a professional context versus the everyday investor. Here are a few of the advantages everyday investor have.
- There is no need to check your portfolio on a daily basis
- You can make decisions consistent with your own time horizon
- Your incentives are perfectly aligned
- There is no need to chase performance
- There is no requirement to be constrained by arbitrary benchmarks
- You don’t need to worry about what other people are doing
Notable quotes from Amazon's Annual Letter (Link)
From very early on in Amazon’s life, we knew we wanted to create a culture of builders – people who are curious, explorers. They like to invent. Even when they’re experts, they are “fresh” with a beginner’s mind. They see the way we do things as just the way we do things now. A builder’s mentality helps us approach big, hard-to-solve opportunities with a humble conviction that success can come through iteration: invent, launch, reinvent, relaunch, start over, rinse, repeat, again and again. They know the path to success is anything but straight.
It’s critical to ask customers what they want, listen carefully to their answers, and figure out a plan to provide it thoughtfully and quickly (speed matters in business!). No business could thrive without that kind of customer obsession. But it’s also not enough. The biggest needle movers will be things that customers don’t know to ask for. We must invent on their behalf. We have to tap into our own inner imagination about what’s possible.
As a company grows, everything needs to scale, including the size of your failed experiments. If the size of your failures isn’t growing, you’re not going to be inventing at a size that can actually move the needle. Amazon will be experimenting at the right scale for a company of our size if we occasionally have multibillion-dollar failures. Of course, we won’t undertake such experiments cavalierly. We will work hard to make them good bets, but not all good bets will ultimately pay out. This kind of large-scale risk taking is part of the service we as a large company can provide to our customers and to society. The good news for shareowners is that a single big winning bet can more than cover the cost of many losers.
If we think about some of the main challenges encountered by investors around issues such as time horizons, over-trading, overconfidence, misaligned incentives and benchmark obsession, these problems are often exacerbated when investing in a professional context. Everyday investors are not immune from these behavioural issues that lead to poor investment decision making but it is important to acknowledge that the investment industry has certain structural features that serve to inflame a particular set of behavioural shortcomings. Many of these structural shortcomings are much harder to avoid when investing in a professional context versus the everyday investor. Here are a few of the advantages everyday investor have.
- There is no need to check your portfolio on a daily basis
- You can make decisions consistent with your own time horizon
- Your incentives are perfectly aligned
- There is no need to chase performance
- There is no requirement to be constrained by arbitrary benchmarks
- You don’t need to worry about what other people are doing
Notable quotes from Amazon's Annual Letter (Link)
From very early on in Amazon’s life, we knew we wanted to create a culture of builders – people who are curious, explorers. They like to invent. Even when they’re experts, they are “fresh” with a beginner’s mind. They see the way we do things as just the way we do things now. A builder’s mentality helps us approach big, hard-to-solve opportunities with a humble conviction that success can come through iteration: invent, launch, reinvent, relaunch, start over, rinse, repeat, again and again. They know the path to success is anything but straight.
It’s critical to ask customers what they want, listen carefully to their answers, and figure out a plan to provide it thoughtfully and quickly (speed matters in business!). No business could thrive without that kind of customer obsession. But it’s also not enough. The biggest needle movers will be things that customers don’t know to ask for. We must invent on their behalf. We have to tap into our own inner imagination about what’s possible.
As a company grows, everything needs to scale, including the size of your failed experiments. If the size of your failures isn’t growing, you’re not going to be inventing at a size that can actually move the needle. Amazon will be experimenting at the right scale for a company of our size if we occasionally have multibillion-dollar failures. Of course, we won’t undertake such experiments cavalierly. We will work hard to make them good bets, but not all good bets will ultimately pay out. This kind of large-scale risk taking is part of the service we as a large company can provide to our customers and to society. The good news for shareowners is that a single big winning bet can more than cover the cost of many losers.
