Good morning.

My column last weekend, How a Flood of Money Swamped Cathie Wood's ARK, looked at how the billions that poured into the ARK funds might have impaired their returns.

That's an old story, of course. Money has always chased past performance.

Imagine a $100 million fund. It puts $5 million, or 5% of its assets, into a stock that has a total market value of $100 million. If it doubles, the fund gains 10%.

Now say the fund has grown to $10 billion. If it puts $5 million into a stock, that’s only 0.05% of the fund’s assets. Such a teeny holding will have to go up 200-fold to contribute 10% to your return. If the manager wants to make a big bet, it takes $500 million now to put 5% of the fund into one stock -- larger than the entire market value of many smaller companies.

You aren't the same person now as when you were a little kid. Why would you expect a fund to be?

Yet all too many people do. No wonder they buy high and sell low: They are extrapolating an unsustainable past. 

I've been writing about this problem for decades, so I especially liked the comment from reader Sam Baird:

That reminds me of something the great investor Benjamin Graham said in an interview in March 1972 when he was asked if financial disclosures were adequate:

The problem is whether the public can be protected against itself by emphasizing the absurdity of [investments] which have had enormous advances in price, with very little value behind them in many cases. I don’t know if there is any solution....I suppose [a prospectus] would have to say in big red-letter words, THIS [SECURITY] IS NOT WORTH WHAT IT IS SELLING FOR.

Graham then added, and a half-century later you can almost hear him sighing as he said it:

I don’t know if that would make any difference either.…somebody [would just say], "What the hell, it is going up anyway."

Last time, we talked about the greatest of the seven investing virtues:

At its heart, discipline simply means not making it up as you go along, never flying by the seat of your pants. It means using rules, checklists, procedures and policies to make decisions.

Discipline is the most important, but curiosity is the first investing virtue. It's what enables you to find and develop all the others.

When I asked readers to name their own greatest investing virtue, Colin Harvey cited curiosity:

I am consistently interested in what’s next and the people and ecosystems surrounding individual companies and/or emerging or changing sectors. For example, I have wondered for years how the real-estate experience could defy innovation for so long, and when that intersected with an opportunity to invest in Opendoor my head was already there. Time will tell if I am right.

Great investors read all the time:

In my whole life, I have known no wise people (over a broad subject-matter area) who didn’t read all the time -- none, zero. You’d be amazed at how much Warren reads -- and at how much I read. My children laugh at me. They think I’m a book with a couple of legs sticking out.
--Charlie Munger

As Mr. Munger has also said:

If you take Warren Buffett and watched him with a time clock, I would say half of all the time he spends is sitting on his ass and reading.

Investor Bill Miller likes nothing better than to discuss ant behavior or chaos theory, self-organized criticality or the philosophy of William James.

Because so much of investing success hinges on pattern recognition, learning about widely disparate fields has enabled Miller to make connections other investors might never notice.

I've called such intellectual foraging "structured serendipity."

Ordinary investors are afraid of what they don't know, as if they are navigating the world with those antique maps that labeled uncharted waters with the warning "here be dragons." Great investors are afraid of what they do know, because they realize it might be biased, incomplete or wrong. So they never deviate from their lifelong, relentless quest to learn more.

I was curious: Can people learn, or be taught, to become more curious?

The answer, it turns out, is almost certainly yes.

The behavioral scientist George Loewenstein of Carnegie Mellon University has written that the wider the "information gap" between what you know and what you want to know, the more intense your curiosity will be. 

You should always write down your rationale for an investment before you buy it. Give a few specific reasons why you think it will go up in value. Put probabilities on your forecasts and estimate how long they will take to materialize.

Later, with hindsight, you can look back and see whether you missed things you could and should have known. What ended up blindsiding you? What could you have read, asked or thought about that might have prevented those surprises? How can you turn gathering more information into a habit? What should you have been curious about?

Be well and invest well,

Jason

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The world stands out on either side
No wider than the heart is wide;
Above the world is stretched the sky,—
No higher than the soul is high.
—Edna St. Vincent Millay