To Beat the Market, You Have to Outsmart Yourself

When it comes to business, we often focus on studying markets, companies, and economic trends. But venture capitalist Chris Paik argues that the most overlooked—and perhaps most crucial—area of study is ourselves. In his latest piece, Chris explores the "inner game" of investing, revealing how self-awareness and introspection can lead to better decision-making and higher returns. It’s something we’ve been thinking a lot about at Every—Dan Shipper has also explored the complex interplay of emotions and intellect.—Kate Lee

Was this newsletter forwarded to you? Sign up to get it in your inbox.

In the world of investing, there are two areas of study. The first is outward-facing—the study of what makes good investment opportunities, businesses, fundamentals, and frameworks. This is where most people spend all of their time, and with good reason. It can seem like the most expansive, information-rich canvas to explore, and many great investors have distilled and published their thinking for future generations to consume. Similar to hard science fields like physics, if you’re studious enough to examine business history, you may be able to stand on the shoulders of great minds who came before you. The “scientific” aspect of investing is alluring, even enticing—the prospect of a grand formula that can distinguish between good and bad investments might seem like the holy grail for a capitalist. 

However, at least in venture capital, it is a goal that continues to elude the smartest and hungriest minds in the field. Even if we get the science right, it’s only part of the formula of good investing.

The second world of study is inward-facing—the study of one’s own judgment, intuition, incentives, and our natural tendency to want to outsmart ourselves: We can fabricate rationales that we know we will accept because we know ourselves. To study ourselves, we must constantly attempt to populate an ever-evolving 2x2 matrix with information:

(a) I think I’m right, I am right.

(b) I think I’m right, I am actually wrong.

(c) I think I’m wrong, I am wrong.

(d) I think I’m wrong, I am actually right.

The question is not if one is subject to mental biases in decision making—it’s which mental biases. When I’m trying to help a new investor understand this dynamic, I ask them to remember their first love—how certain they were that it was going to be a perfect relationship that would last forever, and how wrong they have likely ended up. This failure means they are capable of having 100 percent conviction in something while also being 100 percent wrong. Inward-facing study can bring up uncomfortable truths that should prompt us to debug ourselves, rather than dismiss them to protect our egos. If we debug well enough, we can study ourselves at a distance, like an anthropologist, and come to valuable conclusions and workarounds for our internal obstacles. After all, an oracle that’s always wrong is just as useful as an oracle that’s always right.

For example, one thing that I’ve learned about myself is that in order for me to know that I have conviction in an investment opportunity, I need to do the work of research and talking to founders myself. This insight yields a few actionable takeaways that have fine-tuned my signal for decision-making:

1. If I don’t do the work because I’m too lazy, it means I don’t feel strongly enough about the opportunity, and we should not make the investment.
2. If I stay up late into the night (or early morning!) writing the investment memo for the team to discuss, that is a great signal, and we should probably make the investment.
3. I should pursue investment opportunities alone. If I have a team that does the work of preparing a memo for me, I will have to make an investment decision without knowing my own conviction in the opportunity.

The more that we can understand these meta-level dynamics, the higher quality and more consistent our decisions will become. Our emotions, desires, instincts, and behavioral patterns are all signals that can be valuable inputs, but only when processed correctly and not granted de facto root access. In order to strengthen the muscle of self-improvement, we must hold strong opinions but listen carefully for contradictory evidence. Every decision is a feedback loop waiting to populate the matrix.

The inward-facing world rules many aspects of investing. For example, over the past dozen years, FAANG companies drove the vast majority of returns in the public markets. And yet, many investors missed the opportunity to buy into these companies despite strong fundamentals that would have satisfied conventional analysis. Why? Because the opportunity was “too obvious.” These were already the largest cap public companies and every investor argued that further upside was already “priced in.” That makes sense, but the other insight here is that investors are naturally egotistical—they want to be right AND clever. An investor who makes money through the consensus investment thesis challenges their own self-worth as a producer of alpha. FAANG companies were disproportionately overlooked by capital allocators who searched for an “underdog” elsewhere that they could find returns in. Examining this behavior yields a previously non-obvious takeaway: 

It is easy to underestimate how dominant market leaders truly are.

The challenge with this inward-facing world of study is that it is fractal: As you approach, the horizon moves infinitely. We constantly try to outsmart ourselves once we know how we operate. We tell ourselves that going to the gym tomorrow instead of today is what’s best because we’ll be better rested. There is a constant cat-and-mouse game between our rational self and meta-analysis, each vying for superposition. But it’s also where the most alpha as investors comes from and is wholly unique to each individual. The expansive, information-rich canvas of exploration is not built by studying the outside world—it comes from studying yourself.

We also build AI tools for readers like you. Automate repeat writing with Spiral. Organize files automatically with Sparkle. Write something great with Lex.