The secrets to successful investing

In 1937, a man named Thomas Young carried out an interesting experiment. He had a long corridor with doors all along one side where rats would come in, and doors along the other side where food was.

He wanted to see if he could train the rats to go into the third door down from wherever he started them off.

However, the rats would immediately go to the door where they had found food the time before. But how did the rats know, from an entirely uniform corridor, which door to get into? So Young painted the doors carefully, arranging the textures exactly the same. Still the rats could tell the door that last had food.

Then he thought maybe the rats were smelling the food, so he used chemicals to mask the smell after each run. Still the rats could tell. He finally found that they could tell where the food had been by the way the floor sounded when they ran over it. And he could only fix that by covering his corridor in sand. Finally, he was able to fool the rats and they learnt to go into the third door.

From a scientific standpoint, this was an A-plus experiment because it uncovered the clues the rats were really using – not what one thinks they’d use. And this is the philosophy investors need to carry with them in today’s difficult environment.

The only things they can really control are their investment philosophy and investment process. Controlling your process is absolutely critical to long-term success.

Successful investing needs resolve. Once you take a contrary approach, you have to be able to stand your ground. However, you’ll need to temper the arrogance of taking a stand with a dose of humility, accepting that despite your best efforts and care, you might be wrong. In investing, other people’s perception of reality influences price more than any underlying truth.

Certainty can also be a serious problem – nobody knows all the facts. Instead, rely on shreds of evidence. Be careful when things look too certain in the investment market, when jumping to conclusions comes easy, when making money looks easy.

Keep former US President Barack Obama’s caution in mind: “... we have access to more information than at any time in human history, at a touch of a button. But, ironically, the flood of information hasn’t made us more discerning of the truth. In some ways, it’s just made us more confident in our ignorance. We assume whatever is on the web must be true. We search for sites that just reinforce our own predispositions. Opinions masquerade as facts.”