Ben Carlson on self awareness and not meeting your heroes

Dec 01, 2023

Ben Carlson's straightforward no-nonsense approach is exactly what you need when it comes to money advice. And the admiration of his many fans stems from his ability to deftly combine investor psychology and data in his narratives.

This is part of a series where I attempt to understand the behavioural traits and mindset of money managers and investors. At the end of this (slightly edited) transcript, I have listed the 20 individuals interviewed for this series.

BEN CARLSON is the Director of Institutional Asset Management at Ritholtz Wealth Management, and known for A Wealth of Common Sense.

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I find that you rely heavily on historical data. Data is very objective and unemotional. How do you cross this line when you as an investor, bring your biases and emotions to the table?

I do like to look at history because it gives you a good range and idea of the outcomes that are possible. I think it's impossible to predict what the terms are going to be in the future. But looking at past data can let you know what the risks are going to be, and the fact that everything is cyclical. It's helpful from that perspective.

Warren Buffett has this quote, where he said that if past history was all that was needed to play this game, the richest people would be librarians. Just because you know what happened in the past doesn't mean you can predict the future. But you can still plan for the future based on the probabilities of the past.

It is easy to have your biases be part of that data. You can do back tests that look beautiful. You can torture the data and make it look like anything that you want it to look like. But you also have to behave and follow a strategy in times when something can look very easy on a chart. You see these little squiggly lines in the past that could've been this brutal, bear market. Behaviour trumps all when it comes to the data like that.

It's much easier to behave when looking at a back test or looking at a chart or some strategy in the past and see how great it performed. But how are you going to react when something doesn't go as planned in the future? Because the future is never exactly like the past.

Have you been very emotional in your investments? Have there been any biases that you've had to really content with?

We all have our biases.

You can read all these wonderful books about behavioural finance and behavioural psychology and list off the 20 biggest biases that we all have. But the problem is that we all have our own blind spots. Everyone has their own different type of bias, right? Some people are far too emotional, others don’t have enough emotion. Some overreact, others under react. A lot of it depends on your own personality and make-up. That's why, the strategy that you stick with- the one that fits your personality type, is almost as important as anything.

I have plenty of my own blind spots. Sometimes I'm a little too optimistic about things. That things are gonna get better, and the long run is gonna work out. It's possible that I'll be proven wrong about that someday. But yeah, I think every investor has their own blind spots. That's why one of the most important things as an investor is just knowing and understanding yourself, and where your emotional weak spots are, so you could try to make good decisions ahead of time.

What personality trait, or temperament, works in your favour? 

I guess I never really get too high or too low on things. I think that's true, both in investing and in my life. It's kind of like a strength and a weakness, that I don't really get too high or too low about things. And that's just my kind of my personality. Sometimes it's a good thing and sometimes a bad thing. My wife says, maybe I'm not enthusiastic enough about certain things.

Sometimes you do have to allow yourself to understand when things have changed.  I've always been the glass-is-half-full kind of guy. I think that's fine, because most of the time things work out well in the end. But there are times when things go bad. There's plenty of progress, and markets tend to work over the long term. But in the short term, there's going to be hiccups and there's going to be problems. There's going to be crashes and recessions and all these things. So even if you have an optimistic bent about you, like I do, you have to understand the fact that bad things can and will happen when it comes to financial markets.

Has there ever been an investment where you went with your gut feel or instinct, and it backfired? Or, are you a numbers guy?

I'm generally a numbers kinda guy. But I have had my share and it did not work out very well. I've tried to pick stocks in the past because I know this company, or I think I understand it, or I use the products, and I should just buy it because it makes sense. I've had plenty of those.

That's one of the reasons I've more or less retired from stock picking because I realized that I don't have the personality traits to pick individual stocks. I know a lot of people do, but for me it just hasn't worked out very well in the past, and I know that I'm not a very good stock picker. One of the things is admitting to myself that I'm just not very good at this so maybe I shouldn't do it.

Wow! That's quite a humbling observation to make.

I think that that's tough for a lot of people, because most people are probably overconfident in their own abilities. Especially in the markets. If something goes wrong, it's really easy to blame something else. I would have been right if it wasn't for the Fed, or if it wasn't for interest rates, or if it wasn't for the economy or whatever it is.

It's hard to look yourself in the mirror and say, “Well, maybe the reason that I lost money on this trade or this investment is because I just didn't know what I was doing, or I made a mistake.” I think that's hard for people to admit. It's not like I realized this right away. It took me a while. Self awareness is very important for an investor. This is what good at. This is what I’m decent at. This is what I'm really not good at. And try to separate them.

In your evolution as an investor, how would you describe yourself today as against what you were, say, 20 years ago?

I've always been a long-term investor. That whole mindset and idea has always resonated with me. My early educators, in terms of books, were John Bogle and Warren Buffett. Those ideas of thinking and acting for the long term; that light bulb went off pretty early for me. Understanding that I have decades and decades ahead of me to invest, especially if my money is in the stock market. So I should think and act for the long term. That's always been my ethos of investing.

  • I think that markets generally work over the long term.
  • I think costs are very important and should be kept low.
  • I don't think it's possible to predict the future, but it does help to analyze the present and the past to calculate probabilities.
  • I'm more of an evidence-based investor over someone who pays attention to excitement and fads.
  • I think durability in the investment process is the most important thing. I've always said that a good investment strategy you could stick with is vastly superior to a great strategy that you can't stick with. Behaviour trumps all.

What that means for me is that I try to make good decisions ahead of time. I automate as much of my investing process as I can, and get out of my own way. Because I don't want any emotions coming out in the heat of the battle; in a bear market, or crazy bull market or bubble, or something.

Do these principles of yours over spill into your regular day-to-day personal life? Your relationships?

I think it's important to have a decision making framework for investing, and then for other parts of your life.

I have an idea of how the world generally works, or how the markets generally work, and then I apply that framework to whatever's going on at the moment. Every environment and every cycle is different. I think that's the same way to think about making decisions in life.

I'm a big process-over-outcomes guy. I think that it makes sense to make good decisions with the evidence you have at the time. With the understanding that sometimes, even after taking all the information you have and making a decision, you are going to be wrong and things are going to go against you.

I don't think that necessarily means you have to change your decision-making framework. The more good decisions you make, the higher your probabilities are for success. Thinking of that process versus outcomes and understanding that sometimes you're going to “fail”, even when you make good decisions but that doesn't mean that you should give up on a decision making framework that works for you.

So that that's how I try to think about it in life too. I always tell my kids before their games, “I don't care if you win or lose. I don't care if you score any points, or make any baskets or make any goals. I just care that you try your best and have fun, and then, whatever happens, happens. Don't focus so much on the outcome of the game, and how many points you're gonna score, or if you're gonna win or lose. Focus on the process of the game of playing it right.” And that's the kind of way I try to make my decisions as well.

How have you evolved in your relationship with loss? When, despite following the process, you incur a loss.

When I was younger, the losses stung a lot more. And there's the idea of loss aversion. That loss stings twice as bad as gains make us feel good. That's a Daniel Kahneman idea. And I think it's true in most aspects of life, whether it's losing money or losing a game.

Early on, when I didn't have a lot of money to put to work in the market, seeing the portfolio value drop really stung. It took me a number of years to realize that if I am investing in the stock market for the long term, especially as a younger investor, that means decades and not years.

And I'm a saver. I am someone who saves out of every paycheck. I save on a weekly,  monthly and quarterly basis. So when I see losses in the market, that’s actually a good thing. I had to change the framework of my head. Prices going down is good, because that means I can buy shares at a lower price and higher dividend yield and lower valuations. I kind of learned to lean into that pain, and actually changed the way I thought about bear markets. I think that's very difficult for people to wrap their head around because they just assume that when they see red, the value of their portfolio going down, it has to be a bad thing.

What makes you such a critical thinker. What skills have you learned to come to this position?

I thank you for that. I appreciate that.

Reading and learning from people who are smarter than me. In school, I was never a straight A-student. I would always get B and B+, but I had to really work for it. I never thought I had a lot of natural intelligence, so I really tried to fill some of those gaps by reading a lot. I read all the time. I read people who are smarter than me. I read different opinions. I try to get my analysis from as many sources as I can.

One of the ways to do that is to have a good filter, because there's a fire hose of information available these days. You can get your opinions and analysis from so many different sources. There's 24-hour financial media. There's social media. There's newsletters. There's all these different places that you can get news and analysis from today, which is a wonderful thing for investors. But it can also be overwhelming if you don't have the right filter in place, cause you can get information overload. So I think part of it is understanding and knowing the sources of information. I think I've done a good job of doing that.

And also, just having some self awareness. There's always going to be people smarter than you. So when it comes to investing, you have to understand that your emotional intelligence is way more important than your IQ. And I think that's something that I've realized over time. I've known plenty of really smart people who could probably beat me in an IQ test but might not be able to invest because they can't control their emotions.

Name an investor you would love to spend time with, and why.

I'm a big proponent of never meet your heroes.

If you read a lot of the books about these people and their biographies, you come away thinking that the individual did make some wonderful investments, but other parts of their life had to suffer because they were working so hard. So a lot of the heroes that I've known in investing, I don't know if I'd really want to meet them.

One of them that I actually did meet in person that lived up to expectations, is my favourite writer in all of investing - William Bernstein. He has probably written close to 10 books by now. I got to meet with him and spend a day with him. I really love his style of investing. He's taught me more than just about anyone about investing over the years. He is a former doctor. He is very data driven. But he also marries that data with the behavioural side of things. He understands that the data is useless if you don't have the behaviour and the emotion and the temperament to be able to handle that.

So that's someone that I that I've met and interacted with, who has more than lived up to expectations.

You seem very evolved as an investor. Does anything make you insecure?

Oh, sure. I get insecure a lot, especially if I’m putting stuff out into the public. Every time I hit “publish” on my blog, I have a little bit of insecurity. Does this make sense? Are people going to understand what I'm trying to do? Are people gonna like this?

There’s been times where I have spent a lot of time writing and thought this post will go crazy. People are going to read it. People are going love it. And I get criticised. But then there's these other posts, where I have a thought and write the whole thing in 15 minutes, and it goes crazy, and all these people are reading it.

That’s the life of a writer and a blogger. You have to develop a thick skin, because there's always going to be people who disagree with you. That's what makes the market. If everyone agreed and used the same strategy, and had the same thought process, then there wouldn't really be a market. There's always going to be conflicting opinions.

I think everyone has some insecurities about past regrets and hearing comments from people who may disagree with you. I'm not necessarily perfectionist, but I always think, “Could I have said or done something better than that?”

You have a massive fan base in India. A few people told me to reach out to you and talk to you because they wanted to listen to you. How do you keep your ego in check? How do you stay grounded?

A lot of people from India write to me, and I appreciate that.

I'm just a normal guy. I wanted to simplify this stuff and speak in plain English.

I had family and friends come up to me and ask questions because I am “the investing guy”. So I started my blog with them in mind. I wanted to write for people to understand this stuff.  When I was starting on in the finance world, everyone seemed to make everything so complex. The markets are a complex adaptive system, and the markets themselves are complex if you want to understand the inner workings. But I thought that people made it more complex than it had to be. So I've always been a big proponent of less is more and simple over complex. And that's what I've tried to do in my writing,

A lot of times, when writing, I almost forget that there's someone on the other end that’s reading it. There's this old saying that the reason that I write is to figure out what it is I actually think. So I'm taking these jumbled thoughts in my head, and I'm putting them down, and the whole writing process is helpful for that.

If you're putting stuff out on a regular basis, occasionally you're going to be wrong or someone's going to come back to you with a different piece of data that disproves something that you've written. It keeps me humble, because I get so much good feedback from people who are reading me and saying, “Have you thought about this? Or did you look at this piece of data or this study?”

I go back to the incident where you spoke about your children. You tell them to focus on the process, not the outcome. Would you consider yourself to be a very successful investor or a successful individual?

There’s so many different metrics to look at when measuring success as an investor. Am I outperforming the market? Am I staying in line with the market? What's my risk-adjusted return?

The way that I look at success for investors is: Are you on the path to achieving your financial goals? Because that's the biggest thing for everyone. Am I going to achieve my financial goals? Not, am I doing better than my neighbour?  Are my stock picks doing better than them? I think that stuff can really trip investors up.

Am I on track to achieve my financial goals? I am. So I would consider myself a successful investor. Now, if I look at my returns, I'm sure I could say… “If I would have just done A B and C, my returns could have been way better. If only I had not invested in this, and doubled down on that instead...”

With the benefit of hindsight, the only perfect portfolio is looking back historically. No one knows what the perfect portfolio or optimized portfolio is going forward.

I invest globally. I invest in different asset classes. When you’re diversified, there's always going to be something in your portfolio that is going to hold you back or make you wonder why you did that. Brian Portnoy, one of my friends, always says that diversification means always saying you're sorry. I could look back and say that my returns would have been so much better if I just didn't have these 2 pieces or this one piece, or whatever. But that's not the point of diversifying in the first place. It is a risk control.

So yeah, I’m on track to achieve my financial goals. And I think that's the only thing that matters. The returns, or the alpha, or the outperformance and that kind of stuff doesn't matter to me at all, as long as I'm happy with my current financial situation.

When you look at your evolution as an investor, is there any trait you wish you knew then, when you started off, that you know today? Any regret that you wish, you had started off differently?

I've probably been investing for close to 20 years now.

I think most people who get along in age will tell you that, when you are young, it is not really your stock picks, or you're investing, or you're timing the market. The things that people think are exciting. It's really your personal finances. Developing good habits for saving. Living on less than you make. If you focus too much on the market and investing when you are young, it's not nearly as important.

Investing matters. You have to save and compound your money. But the personal finance stuff matters way more than the portfolio, especially when you're first starting out. The stuff with the markets, you can figure that out later, as long as you develop those good savings habits first.

Individuals interviewed by Larissa Fernand for this series:

  1. Prashant Jain
  2. Sankaran Naren
  3. Nilesh Shah
  4. Vetri Subramaniam
  5. Anand Radhakrishnan
  6. Devina Mehra
  7. Saurabh Mukherjea
  8. Raunak Onkar
  9. Samir Arora
  10. Kenneth Andrade
  11. Rajeev Thakkar
  12. Aswath Damodaran
  13. Ian Cassel
  14. Vishal Khandelwal
  15. Sanjay Bakshi
  16. Ramesh Damani
  17. Jim Rogers
  18. Ben Carlson
  19. Mohnish Pabrai
  20. Christine Benz
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