The experiences all of us have at the beginning of our investing careers do a lot to shape what we believe and how we act going forward. For investors who start around bear markets, that experience can cause them to take less risk than they should for a very long time, and to constantly think the next bear market is around the corner.
But it also works the other way. When you start your career with significant outperformance over the market as I did, you tend to think you are invincible. You tend to attribute all of that outperformance to skill, when in reality much of it is luck. I learned that lesson the hard way.
Probably the biggest change for me in my investing career came when I started following some of the best investors of our time and realized that almost all of them spend much more time focusing on what they don’t know than what they do. That led to the realization that if I wanted to get better, I needed to do the same thing.
Since then, I have tried to regularly write about my mistakes and the lessons I have learned running investment strategies. It has been a major part of my learning process.
So as we approach the end of 2021, I wanted to share some of the lessons I have learned from this year (and the post 2020 bear market period in general).
 The Market is Always a Voting Machine
I have used the idea that the market is a voting machine in the short-term and a weighing machine in the long-term fairly often in my articles. It just seems logical that eventually the market has to care about fundamentals. But the post pandemic market has tested that for many of us as we struggle to explain what is going on in different areas of the market and in certain asset classes.
But when you think about it, the reality is that the market is always a voting machine. Supply and demand and flows of capital will always determine what goes up and what goes down. In the long-run, fundamentals are very likely to matter in that they will drive that voting since what you are buying when you buy an asset ultimately is the present value of its future cash flows. But there is no law that says that has to be true or that it has to occur over a certain period. Those of us that use fundamentals are just betting that eventually other investors will look at what they are buying and value it based on that. I think that is a good bet, but it is hard to figure out when it will happen.
And that brings me to my next lesson.
 It is Important to Understand What Long-Term Really Means
For those of us who invest based on fundamentals, and particularly those of us who use value, setting expectations is really important. Early in my career, I thought 3-5 years was the longest period of underperformance to expect using factor strategies. Then I moved on to thinking ten years was a more appropriate time frame to judge them. Now I think it is longer than that. This comes back to the point about fundamentals in that there is no set timeframe for when traditional fundamental strategies might have their day in the sun again. But no matter how long that is, the one indisputable truth is that the patience of investors following these strategies needs to exceed that time frame. For many, that may mean refining what long-term actually is, and having an honest conversation with yourself about if you are truly willing to wait for it. If not, index funds are likely a better choice.
Which leads into my next lesson.
 Probability Over Certainty
Let’s say you are one of those people like me who are going to tough it out until value works again. If you are going to endure that kind of pain, the future rewards that come with it must be a certainty, right?
One of the biggest lessons I have learned in my career is to try to see the world in terms of probabilities. I would assign a very high probability that value investing will work again. But it isn’t 100%. Almost nothing in investing is. Looking at things in terms of probabilities is a great tool to manage expectations, and it also helps by encouraging all of us to look at the other side. When I change my thought process from thinking value investing will definitely come back to thinking that there is a 90% probability of it (or whatever probability you assign), it allows me to better envision the type of world where that 10% on the other side becomes a reality and what would have to be true for it to occur.
And this doesn’t just cover low probability events. It also covers those that seem like their probability is zero.
Which brings me to my final lesson.
 So You’re Saying There’s a Chance?
Since I’m a big Dumb and Dumber fan, I had to use that line to intro my last lesson. But if you think about it, how many things have happened in the wake of the pandemic that many would have considered low or no probability events. What are the chances a gaming retailer whose business wasn’t in the greatest of shape to begin with and had its stores closed due to a pandemic would see its stock soar nearly 2000% in a month? I would have told you zero before it happened. What are the odds someone would turn $8000 into $5.6 billion in 14 months by investing in a dog based cryptocurrency? If it was possible to assign a probability less than zero, I would have for that one. But both happened. It’s a good lesson for all of us that the standard we need to use to define the word impossible when it comes to investing is much higher than we think it is.
In the end, the biggest lesson of all for me is that there will be a lot more lessons. Every time I think I have investing figured out, it has a way of proving that I do not. If I can accept the fact that what I don’t know far exceeds what I do, hopefully I can continue to learn more lessons going forward, and less of them the hard way.
Jack Forehand is Co-Founder and President at Validea Capital. He is also a partner at Validea.com and co-authored “The Guru Investor: How to Beat the Market Using History’s Best Investment Strategies”. Jack holds the Chartered Financial Analyst designation from the CFA Institute. Follow him on Twitter at @practicalquant.