Finance “What’s the other side of this?” One of the most common (and most dangerous) investment biases is believing information that con rms what you already believe, while ignoring information that o ers an opposing view. at’s why most successful investors go out of their way to get a “second opinion” on their ideas: whether that’s a research report or an article that presents a di erent perspective, or an advisor who can play devil’s advocate, or a trusted research rm that gives good “on one hand this…on the other hand that” analysis, and so on. Do you have to be persuaded by such contrary opinions? Nope. But considering all sides of an issue and/or investment idea will keep your decision-making dispassionate. “What’s my reason for making this investment?” And no, “I want to make more money” is not a reason. You should be able to articulate exactly what you believe about a given investment – why the market is wrong and you’re right about the investment being underpriced? What’s the investment thesis on this idea? Why do you believe in it? How exactly does this investment t into your long-term nancial plan? How does it complement other portions of your portfolio? Answering these questions in a clear, cogent way is a natural protection against many of the emotional biases that can derail your decision-making process. “Am I paying too much attention to the media?” What we see, what we hear and what we read can have an immense impact on our ability to formulate investment decisions. Don’t get us wrong: many of the analysts, pundits and traders in the media are skilled professionals, with a good deal of investment experience and keen market insights, and you should listen to what they say. But this doesn’t mean that they’re always right. Sure, pay attention and consider what the experts are saying. But don’t let that stop you from doing your own homework and formulating your own opinion. “Is the past influencing my decision?” A lot of biases are based on our perceptions of the past. Be particularly cautious about any idea that’s based on an extrapolation of past performance. e same goes for any decision that’s based on considerations of our past experiences with a given investment or stock. As every veteran investor can tell you, the past is no indication of the future, and the only thing that’s constant in the investment world is change. “What have I missed here?” ink of this question as a kind of “gut check” against the tendency to fall in love with our own abilities. Asking yourself what if you’re wrong, what assumptions you’ve made, what you’ve overlooked – it protects you from thinking that you’re smarter than every other investor out there, which can be a particular problem for those of us who like to go against the investment crowd. Sometimes, this double-checking process will leave you con dent in your homework and feeling strong in your convictions. Other times, you’ll feel a little less con dent and you’ll have to re-evaluate your original idea. Either way, you’ll end up avoiding a great many problems that stem from overcon dence. “Am I afraid of missing out on a trend/hot stock/the next big thing?” is is an important question for every investor to ask, and an absolutely critical one for those interested in investment “themes,” trends or highrisk, high-return situations. Going along with the crowd remains a key driver of poor investment decisions. Most of the best investors in the world (Bu ett, Lynch, Watsa, Soros, Graham, Templeton and many others) made millions by doing the exact opposite. ere’s a lesson there. “Have I given this idea a ‘sober second thought’?” is is good old-fashioned wisdom that can keep you out of a lot of trouble. Before making any big decision (in investing or in life), it’s always a good idea to sleep on it, and give your brain time to ush out the excitement, fear or other emotions that may be surrounding the decision. So, before you pull the trigger and buy or sell anything, take a moment (even better, a day or two) to think about something else. en come back to your original decision: many times, you’ll feel the same way about it as you did before. But those times when you don’t can help prevent a lot of headaches. “Should I talk to someone about this?” Not every nancial decision needs to be “cleared” with someone else before youmake it. But for the really big ones, it makes sense to seek out a sounding board – someone who can tell you straight-up if you’re thinking clearly, or if you’re letting your emotions get in the way of your nances. Obviously, it makes a lot of sense for this “someone” to be a nancial professional: a wealth advisor, an investment planner, an accountant, a tax lawyer, etc. But it doesn’t have to be. A trusted friend, a mentor, a spouse, a businessperson whom you respect – any one of these can be a valuable con dant who can protect you from making dumb decisions, and help to ensure that your investment biases don’t sabotage your long-term nancial success. Check your biases: questions to ask yourself OK, now that you know about some of the biases that a ect our investment decisions, how can you protect yourself against these investment biases? Here’s a series of questions that can help determine whether any biases have crept into your thinking. CSANews | FALL 2019 | 37
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