The business of decisions.

On the night of July 16, 1999, John F. Kennedy Jr. taxied down a New Jersey airstrip in his Piper Saratoga PA-32R. Kennedy piloted the high-performance aircraft, his wife and sister-in-law were passengers. Less than an hour later, the plane crashed nose-first into the Atlantic Ocean. No survivors.

The plane didn't suffer a mechanical issue; nor was there any extreme weather. Kennedy — however — had fallen victim to a phenomenon called spatial disorientation. A form of cognitive dissonance. He quite literally did not believe what his aircraft's instruments and gauges were telling him.

Once an aircraft enters conditions under which the pilot cannot see a distinct visual horizon, the drift in the inner ear continues uncorrected. Errors in the perceived rate of turn begin to build up and the error compounds. If the pilot is not proficient in the use of gyroscopic flight instruments - or not experienced - these errors continue to compound. At a certain point, control of the aircraft is lost, usually in a steep, diving turn known as a graveyard spiral.

The graveyard spiral terminates when the g-force on the aircraft exceeds the structural strength of the airframe. This results in catastrophic failure, or the plane hits the ground. All the while, throughout the entire event - leading up to and well into the deadly maneuver - the pilot remains unaware of the turning. The pilot believes the aircraft is flying perfectly. Even though the gauges show otherwise.

Long have I been interested in errors of thinking and cognition.

In business, our desire to feel good about ourselves permeates everything we do. The need to maintain a positive self-image often leads us to adopt a biased image of the world. Learning to align oneself with the facts, means a halt on denying reality, and rationalising our choices. Even in the face of contradictory evidence.

Confidence so often scales with ignorance.

To be in the investment business is to be in the business of decisions. High-quality decisions are the product. They are the true currency. Paradoxically though, a decision's quality cannot necessarily be discerned from its outcome. A good investment decision is one that is optimal at the time it is made, when the future is by definition unknown. Thus, correct investment decisions are often unsuccessful, and vice versa.

One of the most difficult investment decisions is when to sell.

Consider the past 30 years of the S&P 500 and what can be said about stock returns over that period — an interesting rule emerges. In any five-year period, around 5.0% of stocks increase by at least 5 times. When making an investment decision, ask if a given company has the potential to go up by 5 times. The implication is interesting for a buy-and-hold portfolio. A huge per cent of return is going to be concentrated in the top 2 or 3 successful holdings.

The structure of return is thus clear: it is about a small number of big winners.

The biggest danger then becomes selling a stock prematurely and not capturing the outsized impact of a small number of companies. 90 years of US stock market data shows that of the 26,000 companies that could have been invested in, all of the return came from just 4% of those companies. Of the USD 32 trillion of excess value created over that period, half of that value came from just 90 of those 26,000 companies.

Stock markets are driven by a really small number of truly exceptional companies.

Avoid truncating the impact of those long-term winners. The path to significant upside is a reluctance to sell stocks that are capitalising on the opportunity in front of them. Allow them to become a big part of your portfolio.

How investors make big decisions.

Being interested in financial markets is not likely to be a good indicator that someone will be a good investor. A much better indicator is whether they are interested in companies. If they have an interest in business models; what makes a company works; an interest in entrepreneurs, managers and leaders. The technicalities of financial markets are skills that can be taught. What is much more interesting are the underlying companies - the finance piece will look after itself.

Investors need not be genius in every area but should understand the big ideas of most disciplines. They should understand most business models, and work to avoid errors of thinking and cognition. When you’re not an expert in a sector, often the best approach is one that avoids stupidity. What an investor needs is the ability to correctly evaluate selected businesses. Not to be an expert on every company or even many. To be able to evaluate companies within their circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.

No amount of sophistication is going to allay the fact that all knowledge is about the past and all decisions are about the future. Superior investing comes from — in part — correct idiosyncratic decisions: being different and being right. If you think and behave differently from other people — and you’re more right than they are — that’s a necessary ingredient. Every great investment begins in discomfort. Asset prices drop when nobody wants to buy them. Thus, investments with the largest margin of safety or the largest gap between their current selling price and their intrinsic value can be the most unwanted. Holding unwanted assets can be uncomfortable.

The decisions we make, the attitudes we form, the judgments we arrive at, depend very much on what other people are thinking.

Know where the horizon is; know your altitude; trust your data and your gauges. Don't let your cognitive biases betray you into a graveyard spiral.