Learn, unlearn and re-learn

The only function of economic forecasting is to make astrology look respectable.
-John Kenneth Galbraith

Here comes the end of 2010 and the start of a brand new decade. There were lessons learnt and re-learnt and for some unfortunately I still do not learn. Putting the past aside, its time to start anew. Going forward, what are the lessons we can learn from the past that can better guide us towards the future?

Here are my top 5 lists:

1. It ain't over till it's over

Never ever pass judgements too quickly. What might seem a wise choice then might not be so wise later. What might seem stupid then might not be stupid later. Whether you are right or wrong in terms of decisions is all time and outcome relative. You can make all the right moves and the most logical decisions but there is always the element of chance that things might not turn out as expected. There's nothing to rejoice when prices go up and nothing to panic when prices go down. If one does not need validation from the markets, then it does not matter what the market does most of the time.

2. Long-lasting competitive advantage is the driver of value

Statistics and past performances matters as much as how relevant they are as a guidepost to the future. In some cases they can be predictive, in others they are as good as a flip of coin. Value is only as good as how much you will get. If all those earnings and cashflows is going to find itself stuck in some machinery and assets, then unless the company is going to liquidate the assets, you are not going to see those cash. Understanding the economics of a business is a much better way of assessment than some esoteric calculations. Porter's 5 forces though not exhaustive is a good framework to start with.

3. The tendency of man is towards extremes.

Humans are like a pendulum that swings from one end to another. That is why we had cycles in the past, we will definitely have them in the future. However, the magnitude and duration is unknown and unforeseeable. A good business per se does not justify an astronomical price and a bad business per se might not mean it is totally worthless. (It neither works the other way round either.) Reality is not as simplistic as what many people think. Except for scientific laws of nature and history, there is no such thing as sure thing.

4. Psychological biases: Try looking into the mirror

People like to look at success stories and forget about the silent evidences of countless failures. Nothing is more inspirational than fighting and overcoming the odds to emerge victorious. However, one usually fails to notice is that to "overcome the odds", by definition means to be the exception. What makes people like to think "this time its different", for everyone else the rule applies, whereas for me, "it's the exception". Therein lies a paradox, without believing we are the exception, we wouldn't try, then there would be no success stories today. In order to be the true exception, one would have to ask himself and find out "What do you have that others don't? What are you doing that others are not?" Food for thought.

5. It's all a matter of perception

Our internal representations or experiences of any event is not precisely what happened but rather a personalized internal re-representations. People interpret things differently. The conscious mind is unable to process all the signals that are being sent to it. The brain filters and stores the information it needs and ignores the rest. The different filters in place are the reasons why two different people might view the same things differently. Those filters are made of beliefs, values, attitudes and metaprograms. Many of these filters are ingrained and stored within our emotional and cognitive system so much so that we are not aware of it. Since we do not know how things really are, but only how we represent them to ourselves, the best we can do is only to represent them in ways that helps us rather than harm us.