Value investing as a strategy has shown to deliver good returns over long periods of time, and those who do their homework and invest their hard earned cash intelligently can typcially expect to do well.
However, there are many people who lose money in the markets. Why is this? In my opinion, two of the biggest reasons for this are a couple of classic behavioural blunders: confirmation bias and failing to focus on constantly improving your investing skills.
Confirmation bias
Confirmation bias is the tendency to only seek out information that supports an opinion that one already holds. In investing terms, this means looking only for positive data and opinions on the stocks that you hold (or want to hold) and ignoring negative information. This problem has become exacerbated in recent years with the rise of increasingly personalised news sources. It used to be that everyone got the same news; now, thanks to social media, you can curate your own personal news bubble.
While there are definitely benefits to being able to filter out things that might not be relevant to you, by over-filtering we run the risk of missing something important. Most people don’t like to be told that they have made a mistake, but ignoring a problem won’t fix it. I believe that all investors should expose themselves to a wide range of views, especially those that conflict with their core theses. Better yet, they should actively encourage colleagues and friends to critique their stock picks. Any thesis that cannot stand the test of peer review is not worth having.
Failing to self-improve
Investing is like a sport, and the best investors are like athletes - they are always looking to improve their process in some way, to correct a deficiency, to get some new edge, etc. Moreover, they realise that making mistakes is an inevitability of life, and that mistakes are valuable learning experiences.
How can you learn from your mistakes? I find that a good starting point is to keep a detailed journal of all your investing decisions. Note down what you bought and why you bought it, and also make sure to write down what was going through your head when you did. What was your logic for buying a stock? What state of mind were you in when you did this? What time of day was it? Over time, you will accumulate enough data to start looking for patterns in your decision making process. Then you can focus on the things that do work and the things that don’t.
Disclosure: The author owns no stocks mentioned.
Read more here:
- Jim Chanos: Where Do Shortsellers Get Their Edge?
- Stanley Druckenmiller: Risk-Reward Is Not Good Right Now
- Seth Klarman: Reducing Portfolio Risk
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