Becoming A Better Investor: Use It Or Lose It Tendency

Charlie Munger, Vice Chairman of Berkshire Hathaway and a legendary investor and businessman, has a list of 25 psychological tendencies that influence the way we think and make decisions. These tendencies, outlined in his book Poor Charlie’s Almanac, are useful in the world of investing: because, by understanding and recognising these latent biases, we can avoid mistakes and become smarter, more rational investors.

This week, we’re analysing the nineteenth tendency, The Use It Or Lose It Tendency.

What is it?

Munger said, “Skills of a very high order can be maintained only with daily practice.” In other words, when it comes to any good skill, if you don’t use it, you will lose it! Munger says that skills, knowledge, and abilities can degrade if we don’t use them regularly. The human brain operates much like a muscle — it needs exercise and application to stay sharp.

He illustrates this with the example of how we often learn a skill briefly for the sake of passing a test, instead of engaging with it and practicing it regularly till we attain fluency. This brief  “cramming” will result in us forgetting that skill/ability sooner, and we may take more time to recall it or get back on track with it when we need it. Think of all the times we may have pored over our books, learning a particular math equation for an exam, only to forget it by the next semester because we haven’t been practicing it!

How does it play out in the world of investing?

In the realm of investing, this means that we must practice and refine our analytical and critical thinking skills regularly to make sound investment decisions.

The "Use It or Lose It" tendency is especially relevant in today’s fast-paced financial landscape. New technologies, shifting economic indicators, geopolitics and evolving market trends mean that investors need to adapt quickly. If we don’t actively apply our knowledge and stay abreast of new developments, we risk making outdated or misinformed decisions.

So how do we stay sharp in a dynamic market?

• Always keep learning: We need to stay on top of the news and new developments and policies across markets. We should read extensively, attend seminars, and participate in discussions with other investors. The more we learn, the more adept we become.
• Apply that new knowledge: When we learn new techniques or gain new knowledge, we should practice applying those concepts and strategies in our investment decisions. This solidifies our understanding and refreshes our skills.
• Analyse and review: It’s also important to stay engaged with market trends and review our investment decisions periodically, so we can see where we gained (and lost!) and learn from both successes and mistakes.

Investing is a discipline that demands constant learning, practice, and application. If we rest on past wins, relying solely on old knowledge and outdated investment tenets, we may find ourselves losing out and overtaken by more diligent and adaptable investors. So it’s important to stay engaged, up-to-date, and continually hone our skills.