Getting Out of Our Own Way in Investing
Posted on | March 23, 2010 | No Comments
This post is really a riff on yesterday’s A Few Lessons in Behavioral Finance. What I was really struck by is all the psychological traps that are waiting for us. And it really isn’t whether we will make mistakes in investing, that is all but certain, but how we can minimize what often seems to be our basic instincts. That our reactions can be so dead wrong or counter productive to profitable investing. We over react to emotional stimulus. We can be pathological about avoiding losses. We tend to get probability completely wrong. We attribute our success to skill rather than luck.
The big lesson of someone like Michael Burry may be that the most important thing is not to get attached, not to get emotional about investing. As humans we tend to latch on to an idea and get stuck. We aren’t very good at reevaluating new data and changing our mind. Consistency is often valued. But why? If we make a mistake, the sooner we realize it and act on the knowledge, the faster we can make a change and learn from it.
That is much easier to say than do. When I look back at some of my investing mistakes, they are always, and I mean ALWAYS, when I deviate from the investing strategy I have developed. I am not talking about trying a new investing strategy and having it fail, that would be at least useful. No, I mean when I get emotional or greedy and forget the checklist, or worse make exceptions because it feels right, or I have a hunch. As I write this it sounds more like a trip to Vegas than investing, which some of my investments have clearly been. Success in these instances is luck, not skill. As I wrote about in Good Decisions, Bad Outcomes, sometimes you can make a bad decision and luck rewards you anyway. And not very many of my bad decisions have had outcomes.
I have asked this question before and perhaps since I haven’t answered it satisfactorily for myself, I will ask it again. How do we avoid the pitfalls that await us in our own minds? Our bias’s seem to be a banana in waiting for the next investing prat fall. Really the title of this post should have been a Question: How do we get out of our own way in Investing?
What are your thoughts. Leave a comment or email me chroma at chromainvesting.com
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