What I Learnt From Adam Smith About Investment and Money

Chris Susanto

18 July 2020

Who is Adam Smith?

Adam Smith (1723-1790) was a philosopher and economist who was best known for authoring the book An Inquiry into the Nature and Causes of the Wealth of Nations. Wealth of Nations also happens to be one of Warren Buffett’s favourite books.

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What I Learnt From Adam Smith About Investment and Money

1. Professional investors are deemed to be smarter because they can churn out ratios at the touch of a button compared to the small investor. They are in fact, not smarter, they merely have more information

It is true that the pros have more resources at hand to subscribe to Bloomberg Terminal for example which cost a bomb. And they are deemed to be smarter.

But the truth is having more resources and information may not always result in better investment performance. Because investment performance is also a lot about managing our emotions.

2. To be a good investor, you have to be a good brain picker and brain pickers are usually good for a dinner conversation

Hence the saying too, it is not just what you know, but who you know.

This does not mean that we should ask for stock tips.

I think that what Adam might be saying here is that we should leverage on people’s views on some stocks he or she might be looking at.

It is ultimately left to our judgment, analysis, and valuation on whether the stock is worth investing or not.

3. The safest way to preserve capital is to double it

I believe in this insight of him. It is indeed the safest way because if we manage to double our money, we can withstand more draw-down and still preserve our capital.

4. The stock does not know that you own it

This is one of my favorite ones. Recently I talked to a friend, an ex MD of UBS. Even a man of his experience would agree with me that people (including myself) anchor the stock to the price we bought it at. But hey, the stock does not even know that we own it. And at what price. But humans are often very emotional about stocks and anchor them to the price we bought it at.

In the end, what matters is the value of the business, not the daily stock price movement. So in a sense, the price is meaningless, our value of it – and whether we are right or wrong is.

5. 80% of the market game is psychology

I agree. That is why I named my blog re-thinkwealth. It is to remind us to rethink our assumptions and logic. And to remind me as well that ultimately the name of the game is having good emotional control as well as a rational mind.

6. If you do not know who you are, the market is a terribly expensive place to find out

I agree. The stock market often rattles people because [1] they follow people blindly and do not understand what they are doing [2] they forgot that investing in the stock market is a combination of good emotional control as well as having a rational mind.


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