A number of worldly subjects enhance investing wisdom, but the lessons and histories of martial arts provide exceptional value for investors. One of the most famous martial artists, Bruce Lee, was an accomplished author and teacher in addition to his devastating martial art skills. His book, the Tao of Jeet Kune Do, is necessary reading for martial artists and investors. The foundation of the martial arts share many attributes with investing. By taking time to study Lee, you will find an intriguing and effective way to protect your investment portfolio.
I have realized that most important lessons come from outside the “core” disciplines of investing or finance. In fact, I can’t think of many great ideas that originate from the core fields. Instead, subjects such as philosophy, psychology, war/military, and the hard sciences provide real investing lessons. However, only those investors who look introspectively at their mindset and the nature of investing will apply these principles at the right moments.
There are many lessons from Bruce Lee, but the following five ideas will give you an introduction to the parallels between martial arts and investing.
While being trained, the student is to be active and dynamic in every way. But in actual combat, his mind must be calm and not disturbed at all. He must feel as if nothing critical is happening. When he advances, his steps should be light and secure, his eyes fixed and glaring insanely at the enemy. His behavior should not be in any way different from his everyday behavior; no change taking place in his expression, nothing betraying the fact that he engaged in mortal combat. –Bruce Lee
During calm times, you should run through worst-case scenarios, alternate options, and build plans to deal with the uncertain future. Complacent markets provide the time to be “active and dynamic” when running through all the possible ways things can go wrong. It’s a perfect time to simulate all the possible “what if” scenarios that could occur. Rigorous investment preparation starts when things are peaceful, not during crises.
When a crisis actually occurs, you must heed Bruce Lee’s advice and act as if nothing critical is happening. Use these moments to execute the preconceived plan, without manic-depressive behaviors that occupy most investors. If you find yourself desperate to create a plan during a panic, you are not only late but likely to make emotionally charged and disastrous decisions.
For example, if an outside observer saw you during a market panic, would they be able to tell if there is a crisis occurring? Over-reacting and dramatizing market downturns is not a badge of honor – it’s a sign of poor preparation and lack of emotional control. Prepare for downturns when times are calm and the outlook is positive, because you need to keep your head for the rough times that are likely to follow.
Instead of facing combat in its suchness, then, most systems of martial art accumulate a “fancy mess” that distorts and cramps their practitioners and distracts them from the actual reality of combat, which is simple and direct. Instead of going immediately to the heart of things, flowery forms (organized despair) and artificial techniques are ritualistically practiced to simulate actual combat. Thus, instead of “being” in combat, these practitioners are “doing” something “about” combat. –Bruce Lee
In investing’s simplest form, you give up cash today with some uncertain but expected return of cash in the future. That’s it. For some investments, the cash flows my occur regularly and perhaps somewhat predictably; for others it may be a decade before the cash flow received exceeds the cash invested. Neither option is necessarily good or bad – it all depends on what you pay for those cash flows and the riskiness of the cash flows.
Problems begin with investor’s unstable attitudes and poor understanding of the market. Investing has become so complicated and convoluted – constant monitoring of the U.S. and foreign news flow, Federal Reserve actions, Greece problems, short-term volatility, market volume analysis, trend following, technical analysis, earnings estimates, and so on. None of these factors provide any real help for the investor.
What Bruce Lee called a “fancy mess” – distortions that distracts practitioners from the actual reality of combat, is the same problem facing investors: distractions and illusions about what really drives the actual reality of investing.
Successful investing strips away the noise and distractions of the financial industry and redirects focus toward the core principles of what are you paying for a set of cash flows and the riskiness of those cash flows. Everything else is largely a distraction – built in some way to make you act contrary to your nature.
As Bruce Lee stated, “Jeet Kune Do [Lee’s Martial Art] does not beat around the bush. It does not take winding detours. It follows a straight line to the objective. Simplicity is the shortest distance between two points.”
Avoid investing’s “winding detours” - excessive trading, emotional turmoil, fruitless agonizing over noise, pointless ruminations, etc.
To paraphrase Bruce Lee, most investors are not investing, they are “doing” something “about” investing. As Lee mentioned, they have “a blind devotion to the systematic uselessness of practicing routines or stunts that lead nowhere.” So replace superficial activity with real work on the fundamentals of the investment. Make this clear in your mind– are you really investing, or are you dancing around the edges of investing?
Stylists, instead of looking directly into the fact, cling to forms (theories) and go on entangling themselves further and further, finally putting themselves into an inextricable snare. – Bruce Lee
Investors’ greatest problems arise when they are convinced they “know” what’s going on and fail to adjust beliefs when presented with new facts. No one is immune to this problem. Ironically, sophisticated and intelligent investors have a greater chance of falling for these biases.
Investors have a hard time accepting the failure of their prior beliefs and theories, especially those held for a long time or those that were developed internally. Ego protection is a problem in martial arts and it’s a problem in investing - it’s a problem for life in general. The unwillingness to kill your sacred beliefs leads to disaster.
Bruce Lee stated, “As martial artists continue to pursue a path of blind acceptance and unwavering confidence, they trap themselves in an ‘inextricable snare’.”
Investors often have the same mindset. I regularly witness bad beliefs. Some investors fall in love with certain asset classes (gold, T-bills, stocks) or pet theories (the U.S. dollar is worthless, capitalism is evil).The problem isn’t that they hold incorrect views, it’s their absolute conviction that they are right that is the major problem.
“Understanding requires not just a moment of perception, but a continuous awareness, a continuous state of inquiry without conclusion.”- Bruce Lee
Premature closure of one’s mind and acceptance of things as true/false is a handicap – not a blessing. Since people’s minds are resolved to remove ambiguity, we create stories to make sense of this world. Your ultimate desire to have mental closure over their investments is a short-term emotional fix that will lead to longer term damage. You must accept that the world is uncertain and highly unpredictable – your beliefs today are likely to be proven wrong in the future. But this should not be viewed as a negative – it’s simply reality and part of our human nature. Acceptance of this fact leads to a tremendous amount of peace and contentment when you abandon the belief that you have to know everything. Instead, you remain in a “continuous state of inquiry” – always ready to update your beliefs and never hesitant to admit your errors.
The second-hand artist blindly follows his sensei or sifu accepts his pattern. As a result, his action and, more importantly, his thinking become mechanical. His responses become automatic, according to set patterns, making him narrow and limited. – Bruce Lee
One of the most influential investors is Charlie Munger. His ideas surrounding mental models has been a beacon of light in an industry polluted with bad ideas and self-serving activities. Bruce Lee also reinforces the Munger’s warning on the limitations of blindly following one ideology, theory, or pattern.
Investors, like martial artists, need to continually expand their circle of competence and actively seek out new theories that disprove their current beliefs. In combat, failure to embrace better methods leads to death. In investing, failure to embrace better methods of analysis and knowledge lead to portfolio destruction. Investors who resolve that they “know enough” and don’t need to learn will succumb to obsolescence and decay.
- Have a contrarian mindset - skeptical/questioning during bull markets; calm and decisive during bear markets.
- Focus on investing’s core principles – stay away from superficial and “flowery” activity.
- Avoid investing dogma – continuous challenging of your beliefs and desire to seek disconfirming evidence.
- Accept the never-ending learning process with investing – you will never get to 100% certainty and comfort.