An Antidote for Overconfidence
If investors are often wrong, but never in doubt, the natural question becomes: Is there a way to circumvent the process? Some simple tactics may prove helpful.
In 2007, a few years before Lehman Brothers filed for bankruptcy, Dick Fuld was one of the most influential and respected men in the global financial market. He ran the fourth-largest U.S. investment bank, which he had largely built. He sat on the board of the New York Federal Reserve, essentially the federal government’s eyes and ears on Wall Street. He had access to everyone, and everything. Yet, when asked what kept him awake at night, he had a humble answer: “What I don’t know.”30
Sandy Frucher, vice chairman of NASDAQ OMX, which runs the NASDAQ stock market, is one of Wall Street’s shrewdest executives. He has a simple definition of intelligence. He defines smart as knowing what you don’t know.31
This type of basic intellectual questioning characterizes the very best investors. Good investors are highly skeptical. They believe almost nothing they hear, and double-check, at minimum, what they read. Remember what Blackstone’s Stephen Schwarzman does when he, or his firm, makes a mistake? He finds out why, so it doesn’t happen again.
The most famous example from the credit crisis is how John Paulson, the hedge fund manager, decided to see for himself if it was really true that U.S. housing prices had never before declined. Well, we know how that ended.
Tilson, the hedge fund manager, keeps ...