There are many things you can learn from books, but there are a few lessons you really need to go through yourself before you can properly apply that knowledge in life or the markets out there.
What Do You Really See?
You see, investing is less about being the best investment or stock picker, it’s about making sensible, rational investment decisions on a constant basis. That’s really what it comes down to. People use different techniques for that. But how do we make good decisions? We avoid the bad ones.
Has a number ever become stuck in your head and you saw it pop up everywhere? That’s because of our incredible pattern recognition machine. We used to be hunters and needed to locate prey in thick vegetation. For that, you’d obviously need a brain that can quickly identify animals in changing environments. In today’s environment that can be numbers, faces, you name it and seeing through all that ‘chaos’ becomes amazing easily.
I strongly believe in applying such evolutionary knowledge to markets – so how could we use the knowledge of evolution to help us make better decisions? Right, we need to identify the weaknesses and balance them out.
The “Weakness” In All Of Us: Harmonized Belief System At All Costs
*The* fundamental weakness of our brain is that we see what we want to see. Our brains create a harmonized belief system. Information that does not fit the current belief system quickly gets dismissed unless you train yourself to adopt a different behavior.
You have invested time and potentially money in your previous belief system, so it is difficult to apply new knowledge that is completely challenging your existing ideas. This is also known as cognitive dissonance: We find it hard to embrace conflicting ideas for a variety of reasons:
- – Old idea is more self-serving
- – Old idea fits into own belief system
- – Old idea is socially acceptable, new idea may be not or may be ridiculed by peers
Why is it so important to overcome this weakness and not immediately dismiss new information that does not fit our existing ideas? Well, you see it in the world around us. Short-sighted banks are creating major bubbles that can bring down the entire economy all because they don’t do the legwork to actually dig deep. The result: Corruption, bubbles, divorces, failed businesses – all because of our incredibly poorly developed brains that have a problem applying radical new ideas such as “the bubble is real”, “there is no demand for product XYZ”. It’s also the reason why many industries stagnate.
Brains More Than Willing To Ignore Cold Hard Facts
Here’s a real-life example of how incredibly bad our brains are prepared for reality.
This is not just a problem for making smart investment decision, it’s a problem for the entire human race. People judge all the time. It’s part of being human. When we interact with a person we most often have made up our mind about the person within 10 seconds. 10 seconds. It takes hard work to overcome a first impression. Most people are also incredibly superficial: How you present something often matters more than the actual content.
How To Overcome Your Confirmation Bias In The Markets
Most businesses don’t fail because their owner is bored or quits, it’s because they make the fundamental mistake of throwing good money after bad – again, because of confirmation bias. Once you have invested a certain amount, let’s say 100 grand and a considerable amount of time into something, chances are you won’t let go of your initial plan that easily, nor should you. Endurance is key – but when is endurance and patience foolish?
That’s the key question and there’s only one way to figure this out: Dig deep and don’t be afraid to accept radical, challenging and conflicting new ideas. If you are unwilling to spend a few hours on research every day, you are gambling more than anything. Create data sheets and use tools to keep them up to date e.g. Google Alerts, IFTTT, RSS. An initial investment hypothesis is good to have and you should not easily dismiss it, but when information becomes available that greatly contradicts it, you better listen instead of ignoring reality. This becomes even more difficult if you’re already in the red. If you have money on the line, pulling out of an investment becomes more difficult. You’d rather look for information that confirms your initial hypothesis than information that contradicts it.
A potential move could be to cut a fixed percentage of your losses, monitor the situation and shift capital around pro-actively. It’s rarely a good move to sell everything. Just like you buy in tranches you should sell in tranches.
Acceptance And Dealing With Realities
Becoming pragmatical is not so difficult. Stop listening to whatever the self-proclaimed gurus have to say and start listening to the markets. Deal with reality and don’t live in a fantasy world. Unless you or a company that you invest in give the market something unique with commercial applications you’re not going to get far.
Don’t enter the state of denial, it’s a state where you’re only allowed to drive 30.