Overview – Does Perfectionism Have a Place in Investing?
From the time an investor first comes up with an idea to when they finally make a decision, there are dozens of steps that need to be taken before that final step happens.
The quality of an investor’s work has a direct impact on how their decisions ultimately turn out. In your own life, you probably spend a fair bit of time gathering the relevant facts and weighing your options before deciding on something important.
So, an investor who chooses to rush their work because of their laziness shouldn’t be surprised when they make a bad decision – after all, they made a conscious decision to rush their work and not check for any major errors, so they have no one else to blame but themselves.
Sometimes, all it takes are a handful of major blunders to destroy everything an investor has worked so hard to build.
If rushing investment-related work is a bad idea, then the logical solution should be to do the opposite, that is, make sure everything is absolutely perfect…right?
Assuming you have the time, there’s nothing wrong with trying to complete your work to the highest standard of quality possible. However, even the best work may still have a few, minor errors, but these errors are usually inconsequential.
In investing, just like anything else in life, refusing to accept anything less than perfect, even if the effort needed to achieve such perfection outweighs the benefits to be gained, usually results in more harm than good.
Investing, Just Like Any Other Endeavour, Is Fundamentally Imperfect
Before I started my engineering studies, I was under the impression that engineering was an extremely precise and meticulous field, where even the tiniest detail has been calculated and accounted for.
For the most part, this is true: behind any engineering design or creation are countless hours of calculations, revisions, iterations, and refinements.
Engineers make products and/or provide services that people use every day – the last thing any engineer wants is for their work to harm the person using it, so they do their best to make sure everything works as intended.
However, it didn’t take long for me to learn that engineering isn’t as pretty as I originally thought it was. Behind every engineering product or design are fixed mistakes, revised calculations, and some educated assumptions.
Sometimes, data is expensive to gather, so engineers have no choice but to work with what they have, lest they want to spend prodigious amounts of money trying to get more data.
The real world always behaves differently from what engineers originally dream up on paper – a skilled engineer understands this, yet they still do their best.
While engineering and investing are two distinct fields, they share some similarities, one of them being that they’re both fundamentally imperfect.
When learning about investing for the first time, every scenario and example presented is usually under ideal circumstances. This approach makes sense if you’re just starting your investment education – there’s no way you’ll understand a concept if too many parameters or special conditions are also present.
However, you don’t need to be an experienced investor to quickly learn that investors operate in an imperfect world, and as a result, investing as a whole is imperfect as well.
Investors won’t always have all the information they need, market activity won’t always make sense, investment strategies can fail, and logical thinking can quickly be abandoned in exchange for untethered emotions at the drop of a hat.
There’s a reason why learning about investing solely by reading isn’t a good idea – you don’t learn how investing works out in the imperfect world, and as a consequence, won’t be able to reconcile the differences between theory and reality. One of the last things an investor wants is to be disconnected from reality.
Investing can get messy at times, and understanding what to do next or how to respond to a situation isn’t always clear. No amount of reading can prepare an investor for the unexpected circumstances they’ll eventually run into.
Despite this, a skilled investor understands and accepts that they live and work in an imperfect world, so they do their best to adjust accordingly when necessary and to make the most of what they have.
If, however, an investor refuses to accept this imperfect reality and adamantly holds onto their perfectionism, then they’re only hindering their own progress.
Perfectionism Is the Path to Stagnation
Have you ever met someone who refuses to say yes or move forward unless everything is absolutely perfect?
Perfectionists are usually very strict about making sure every single condition they’ve set is satisfied. If anything is even remotely off or just slightly below standard, they will refuse to give their approval or acknowledgement.
To them, nothing is more abhorrent than being forced to settle for anything less than perfect. Any sort of flaw or defect, no matter how trivial, must be removed at all costs.
An investor who insists on perfectionism will likely refuse to make an investment decision unless their analysis has no mistakes whatsoever, will try to come up with flawless investment strategies, and won’t pursue a prospective investment unless they’re absolutely certain that it won’t experience any troubles in the future.
However, any investor with real-world experience understands that investing simply doesn’t work like this at all: even the best analyses will be prone to minor errors, no investment strategy is bulletproof, and nobody knows for certain how a company will perform in the future (many large, established corporations were hit very hard during the COVID pandemic).
If an investor refuses to move forward unless perfection has been achieved, then they’ll quickly find themselves standing still virtually all the time.
One of the dangers of perfectionism is that it begets stagnation.
Investing is an activity where you need to keep moving forward if you want to achieve your goals. How can you possibly hope to accomplish the goals you’ve set for yourself if you refuse to even move forward in the first place?
Now, not every step will always go according to plan, but again, that’s to be expected. Just because you run into some problems doesn’t mean it’s time to give up: a bit of creative thinking and problem-solving can quickly get you back on track towards achieving your goals.
It’s important to remember that plans change all the time, but goals don’t need to. Every day, people achieve certain goals, even if they needed to take several detours in the process.
One of the nice things about investing is that there are different ways to achieve your goals. Learning how to adapt when things don’t go your way is a much more valuable investing skill than trying to make sure everything you do will go flawlessly.
Moving forward and making adjustments along the way when needed is much better than standing still waiting for everything to be perfect. This is because when you choose to move forward, you’re still making progress, even if things don’t go your way all the time.
If you like to sit around and wait as you tightly cling to your perfectionism, then go ahead. But if you’re someone who wants to progress towards achieving your investment goals, then ditch the perfectionism and keep moving forward.
Making progress, no matter how little it may seem, is still progress. Take enough steps forward and eventually, you’ll achieve your goals.
Perfectionism and Diminishing Returns
Another problem when trying to make everything perfect is that prodigious amounts of effort are exerted to try and fix things that may bring very minimal benefit. That is, diminishing returns and perfectionism go hand-in-hand.
Every investor has limited time, energy, and capital. In the world of economics, these resources are classified as scarce – that is, these resources are limited. Because an investor’s resources are scarce, they constantly need to decide how to best allocate them.
Is an investor better off looking for new investment opportunities, or should they instead sit down and assess how to improve their current portfolio? If an investor has several prospects they want to invest in, which ones should they put their money towards, and how much?
Although they may not consciously think about it, investors are always trying to find the right balance between resources spent and output gained.
Trying to fix every minor problem, no matter the cost, fundamentally goes against the reality of scarcity. Even the world’s largest institutional investors have limited resources, so taking a “whatever the cost” approach is wishful thinking because no investor has the ability to do so.
If, despite all of this, an investor still insists on trying to correct small mistakes or make very minor improvements, is the outcome really worth all the resources that are about to be spent?
Are you really willing to spend thousands of dollars for an outcome that will yield less than $100? Is there really a valid reason to fix a minor mistake besides the reason of “I find it annoying”?
People and institutions have free reign over how they spend their resources, but it wouldn’t hurt to seriously ask how much they’re willing to spend to fix problems or correct mistakes that may not even need to be addressed in the first place.
Knowing the Difference Between Excellence and Perfection
If perfection can’t be achieved in investing, does this mean investors are free to perform half-hearted work? After all, if mistakes and errors can’t be removed entirely, then what’s the point of putting in the effort to try and avoid them?
While achieving perfection is impossible in investing, there’s nothing wrong with trying to aim for perfection because you’ll end up achieving something that is attainable instead: excellence.
In mathematics, there’s a phenomenon in analytical geometry known as an asymptote. Asymptotes can be observed on a curve when there’s a specific value that a function cannot take as its input because it will make the function undefined.
Below is a graph showing the curve for the function y = 1/x. Notice how the curve doesn’t cross at x = 0 because you cannot divide by 0, so as a result, the curve can never take the value of y = 0. The vertical asymptote is at x = 0, and the horizontal asymptote is at y = 0.
The asymptotes go on forever to become infinitely closer to 0, but they can never take on that value. 0.000000001 is very small but is still non-zero.
This same idea of becoming infinitely close to something but not achieving it is the same when it comes to aiming for perfection but achieving excellence.
There’s no way we can achieve perfection, but because we put in so much effort to get as close to perfect as we possibly can, the quality of our work is still extremely high as a result, that is, the result is still excellent.
It may be impossible to perform investment analysis that has no flaws whatsoever, but if you aim for perfection then your work will still be very high quality, and whatever errors do remain are likely to be trivial.
No investment strategy may be bulletproof, but an excellent investment strategy still has an incredibly high probability of succeeding, and even if it were to fail it’s probably due to some extraordinary event that’s well beyond your control.
As you can see, perfectionism isn’t required in investing because there’s simply no need for it. In the vast, vast majority of cases, there’s essentially no difference between something that is perfect and something that has achieved a high level of excellence.
Not everything has to be flawless in order to succeed as an investor – as long as your work is excellent, then whatever flaws that do remain are almost always insignificant.
Making excellence your gold standard as an investor is much more realistic, not to mention less stressful than trying to achieve something that can never be achieved in the first place.
Wrapping Up
Perfectionism and investing are fundamentally incompatible. This is because the demands of perfectionism have very little alignment with the imperfect realities of investing.
Not only does perfectionism quickly lead to stagnation, but it almost always leads to diminishing returns as well. As an investor, you can’t possibly hope to reach your goals by standing still, nor do you have an infinite amount of resources at your disposal.
Instead of doing whatever it takes to achieve perfection, an investor should try their best to achieve excellence. Excellent work is still prone to minor errors and mistakes, but these imperfections are usually so minor that it they’re usually inconsequential.
Perfectionism isn’t necessary to succeed as an investor. If anything, trying to be a perfect investor will only result in more harm than good.
