Successful investing outcomes, be it in public or private markets, are typically the result of the following sequence of events:

#1 Real world research and/ or experience germinates a non-consensus view.

#2 A conviction-building process for this view helps in getting to a probabilistic distribution of future outcomes.

#3 Courage helps in putting real money behind the view.

#4 If all goes well, the non-consensus view starts turning out to be right (non-consensus ➡ non-consensus-and-right).

#5 After a certain hold-out period, the market provides a liquidity opportunity that is attractive-enough for the investor to cash out.

Investors have to fight specific pitfalls at each step of this sequence:

For #1, it’s the herd mindset that evolution has deeply wired into our psychology. We seek comfort in others validating our views, which is the exact opposite of what contrarian thinking entails.

A by-product of herd mindset is FOMO, which has quickly become the dominant driving emotion of modern urban life.

For #2, it’s hasty bias-to-action. Individuals have a tendency to overcommit & get positively biased very quickly, often even before adequate investigation. Every investing action releases dopamine, which makes individuals feel powerful & good about themselves. Therefore, even sophisticated individuals are quite trigger-happy & demonstrate a tendency to “just do it”.

Running a solid investing process calls for a scientific approach that starts with default skepticism, generating a hypothesis & then putting in the work to approve/ disapprove it with intellectual honesty. PS: check out more about bias from consistency & commitment tendency in this amazing write-up by Charlie Munger on Farnam Street.

For #3, it’s fear. Fear of losing money, of losing face, of future distress. Am sure we all have seen many examples around us of folks who did a decent job at #1 and #2, but never pushed chips on the table. That friend who spotted Google at the earliest stages. Or who had heard of Bitcoin from credible sources before everyone else. Or who was seeing East Bay become the new South Bay or Gurgaon become the new Delhi.

Am also confident that as children, each of us saw our parents hold a non-consensus view for those times & not act on it, which in hindsight, would have led to asymmetric gains.

For #4, it’s lack of patience. Markets typically take time to appreciate & subsequently reward non-consensus views. This period can range from a couple of years to sometimes more than a decade. Holding out with a view that doesn’t match the crowd for long periods of time is extremely hard psychologically for even the most experienced investors.

Humans by nature seek thrill & quick rewards. While a lucky few are born with the delayed gratification gene (like this Nevada’s Pension Fund Manager), for others like us, we have to train ourselves to get better at it.

For #5, it’s greed. Once the market slowly starts appreciating your non-consensus view, given its pendulum nature, it then starts gradually moving towards the other extreme. At a certain point in time, it will soon provide windows where very attractive, & sometimes egregious, returns can be booked. Case in point: after the Nvidia stock stayed flat for several years, the recent AI-fueled stock run-up is finally providing an opportunity for insiders to cash-out.

But then, greed starts kicking in. Maybe hold-out longer for even better returns? This is where the discipline of taking chips off the table & booking profits becomes really important. However, this is really hard to do when investors have faced a long lean period & are now starting to see things finally go up. As legendary fund manager Mohnish Pabrai often says – the art of when to sell is the most difficult.

To summarize, the key to successful investing is recognizing and working towards actively avoiding the above landmines at every step of the way, most of which are behavioral.