The Single Biggest Threat to Investing Success… and How to Manage It
Have you ever encountered a rotten egg?
Remarkably, as someone who enjoys eggs with breakfast almost every day, I hadn’t.
At least until earlier this week when I came across my first, honest-to-goodness rotten egg. Or, should I say, it came across me—spraying out of the shell in all its rotten glory.
Like most people, I consider myself made of sturdier stuff. However, standing there gagging, dripping with the eye-wateringly noxious contents of said rotten egg, all I could do was wail plaintively in the hopes my wife would take pity on me and do something.
Fortunately, she did: giving me instructions from a safe distance as to how to clean the mess up.
It’s funny, I thought after a long shower, how we can grow up with certain sayings like, “Last one across the line is a rotten egg,” without fully understanding what it is we are referring to. Well, now I know.
This past week, we witnessed a large protest of women and women-wannabes who seem to have concluded that Donald Trump is a rotten egg in human form.
Speaking as a Vietnam-era protestor myself, I can’t help but wonder what exactly the protest was against.
In Vietnam, there was a straightforward moral argument to be made against the US utilizing its considerable military force to bomb a small and unimportant third-world country back into the Stone Age.
In the case of the Womyn’s March, the litany of reasons for the march remain vague. Was it because Trump commented at how some women were willing to essentially prostitute themselves to be in the company of rich and powerful men, despite that statement being demonstrably true?
Or was it because of some imaginary war Trump was about to unleash on women, gays, foreigners, and so forth?
Over the past week, I have been reading and watching interviews with some of Trump’s key advisors to try and ascertain their actual views on things… as opposed to their tortured-by-the-media views to suit the progressive agenda.
As a result of the exercise, I have learned a few things I feel are useful.
For example, it’s clear that Trump’s economic team is hard-focused on cutting corporate taxes to 15%. Likewise, they are intent on chopping back the jungle of regulations clogging American enterprises.
I don’t care who you are, those actions are good for everyone in the US. Taken together, they will allow the economy to finally raise its sails and leave the doldrums it has wallowed in since Obama took office.
As importantly, should Trump’s team succeed, America will once again become a beacon to the rest of the world by demonstrating the benefits of having a smaller government footprint on the back of their citizens.
Along the same lines, Trump’s decision to scrap the Trans-Pacific Partnership (TPP) is also good. The last thing the world needs is another supranational bureaucracy. If the US wants to trade with China, why does it need to take other countries’ entrenched interest groups and political machinations into consideration?
Those countries can directly negotiate their own damn treaties.
Against those clear positives, we have the potential for a trade war with China, but I can’t see how that would benefit either side, so I suspect it won’t happen. And besides, the US has a lot of leverage in the negotiations, given that it is China’s #1 export market by a wide margin.
Instead of a trade war, could the outcome be a reduction of existing Chinese trade barriers and, as a consequence, a bigger market share for US companies in China? Maybe.
Given these apparent priorities for the Trump administration, I wouldn’t bet against the US stock market continuing to rally for a while longer.
There are, however, concerns I have after watching Trump’s military advisors. While “Mad Dog” Mattis seems to be particularly reflective and therefore less prone to knee-jerk reactions—which is a good thing—in one interview I watched, he quoted Henry Kissinger, a war-mongering meddler of the highest order.
It also appears clear that the Trump military team views Iran as the “big” enemy about which something needs to be done.
With decades of experience to reflect on and technologies allowing the US to finally be energy-independent—especially with a lightened burden of regulation—one would hope US policy-makers would learn to break their addiction to military involvement in the Middle East.
Alas, that may not be so.
Regardless, nowhere in my reading can I find a single example of Trump or his team vowing to turn the cannons of their newly acquired political power in the direction of women, gays, or any other group residing legally in the United States.
Yes, he has vowed to clamp down on illegal immigration—which is to say, follow the same policy as every other country in the world. And he has stated his intention to slow down legal immigration, in particular from Muslim countries, but only until a better way can be found to properly vet the visa applicants.
One could argue around the edges of these policies, but to label them racist is to misunderstand the world we live in.
The wall with Mexico? The border is 1,989 miles long. There is already a high and daunting fence of almost 600 miles on the border. So what we’re really talking about here is extending the existing infrastructure.
Yet, reading the press, you would think “Trump’s Wall” was a brand-new and inherently oppressive idea.
For the record, every year there are over 350 million legal crossings of the US-Mexican border, so it’s not like people from Mexico can’t cross. It just requires following a process. Which, again, is exactly what every single country in the world requires.
The real problem Trump faces in these early days is a media smear campaign that has been highly effective at tapping into the latent biases of the intended audience.
This is a topic I have touched on in this weekly missive before, in my article, “The Parade-Goer’s Guide to Political Propaganda.”
The level of fear and misconception ignited by the biased coverage is, frankly, astounding. Especially given that Trump hasn’t even been in office a week.
The overreaction by roughly half of the citizenry is deeply concerning, and would be more so if I still lived back in the US. At the very least, they should give Trump a month or two before deciding he’s the bogeyman the press has created in their minds. That would seem to be not only the democratic way, but the rational way.
In the end, if Trump turns out to be a rotten egg, believe me, we’ll all know it.
Speaking of bias, friend and colleague Stephen McBride sent in a very useful dissertation on investment bias.
I cannot stress enough how important it is to check both your bias and your emotions at the door when making investment decisions. The only proven way to beat the markets over time is by following a strict investment discipline.
I really want to stress the point. When I say, the “only proven way” to beat the markets, I am not using hyperbole but stating an empirical fact.
In this month’s edition of Compelling Investments Quantified, released yesterday, we share an impressive long-term study that shows, hands down, that our approach to finding value in an overvalued world outperforms all others.
It particularly outperforms trying to guess the direction of the market, or falling in love with an investment sector and then limiting your reading entirely to those gurus who write articles supporting you in your bias.
If you sign up for a free trial to Compelling Investments Quantified today, within just a minute or two you’ll be reading about our latest recommendation—a surprising company that is all but immune from global turmoil.
And with that shameless but accurate plug, here’s Stephen.
The Single Biggest Threat to Investing Success… and How to Manage It
A 2009 study found that people are twice as likely to seek information that confirms their beliefs than to seek evidence that discounts them. Peter Watson first proved this with his selection-task study in the 1960s.
As our thought process—which sometimes is influenced by terrible ideas and biases— guides our choices, it can be a very costly mistake. Especially when money is on the line.
Under the spell of this bias, the more you learn, the more certain you become that you are right. We don’t know it at the time, but biased research paints an incomplete picture of the situation. A 2015 survey by the CFA Institute found confirmation bias commonly influenced investor judgment and led to poor investment choices.
A look at the actions of gold bulls over the past decade is a good example. In the three years after the 2008 financial crisis, gold rose over 60%. Pointing to the economic and monetary follies of the period, gold bulls believed the yellow metal would continue to climb and invested accordingly.
Since its 2011 peak, gold has fallen by 35%. During its decline, bearish signs like a strong US dollar were ignored. Instead, they focused on the reasons why gold had entered a new bull market. They later paid the price.
This bias has been observed in other investors. A 2010 study found that investors on online stock message boards strongly preferred ideas that matched their own. When investors had a “strong-buy” view of a stock, they were eight times more likely to click on bullish posts about it.
The study concluded that the most biased investors became overconfident in their beliefs due to confirmations. In the end, when an investor’s bias increased by one standard deviation, it led to excessive trading and decreased returns by over 9%.
With a myriad of online investment information, having biases is easier than ever. Whatever your views, you can connect with others who share them. This can lead to an echo chamber-like environment for investors.
When things are going well, there is no problem. But when investors hit a rough patch, they may have no clue why their picks are tanking, so they are likely to repeat this mistake time and time again.
If bias intrudes on our decision process, how can we manage the risks it poses?
It’s natural to look for evidence that confirms our beliefs, but we should actually be doing the exact opposite. To test a premise, we must subject it to contrary evidence and see if it stands or falls.
Warren Buffett, one of the most successful investors in history, knows this and proactively manages it.
(If you want to learn how to use the same strategies that legendary investors Benjamin Graham, Warren Buffett, and David Dodd all used to build their fortunes then you owe it to yourself to read our FREE special report, Dimes For Dollars: The 3 Most Powerful Strategies to Buy Low and Sell High. Download here.)
For the 2013 Berkshire Hathaway annual general meeting, Buffett invited fund manager Doug Kass, a vocal critic of Buffett, to participate. While Kass didn’t convince him to dump any of his stock, Buffett knows he must expose his ideas to conflicting thoughts.
This may sound easy, but the fact that 99% of actively managed equity funds underperform the market tells us it isn’t. An effective way to nullify decision bias is to create a disciplined investing system.
Such a system must have strict, predefined guidelines that you don’t dare deviate from. Having rules that detail the maximum loss you are willing to take on positions is essential. You can automate this by using stop-losses on your investments.
Having a specified exit strategy is also crucial. Before you invest, write down a few points stating why you would sell or add to your position(s) in the future. This could mean taking action when the investment reaches a certain price or ratio.
Investors must also take a long-term view to investing and try not to get caught up in short-term moves. It’s easy to buy rising investments or sell falling ones in an instant. However, making quick trades is one of the reasons active investors underperform the market.
Another way to limit the damage bias can cause is by using a dollar-cost-averaging strategy. With this strategy, investors make small, regular investments instead of large one-offs. This limits potential downside risk and protects against the emotional roller coaster that comes with holding large positions.
It’s important to invest in line with your personal risk tolerance. After all, the purpose of investing is to gain wealth… and you can’t become wealthy if you’re consumed with worry.
For investors, developing an objective strategy is essential in limiting the threat of confirmation bias. If you let this bias go unchecked, you risk undoing all the hard work you put into your investments.
Bringing discipline to your investing is as easy as a no-risk trial subscription to Compelling Investments Quantified. Using a comprehensive analytical process, including the proprietary CIQS quantitative model, David Galland and Jake Weber uncover great companies selling at deep value. Get started today!
Here Come the Clowns
KKK On Kampus! I know it is just juvenile to laugh out loud at… at… ignorance? The brainwashed? The low information processors? The paranoid? Even so, I can’t help myself.
Whatever you want to term it, a student of color at a college in Ohio was walking by a window when she looked up and, gasp, saw a hooded KKK member loitering within a classroom.
She quickly shot a video on her phone and shared it with the University president as proof that the KKK was active on campus. Before, I assume, fleeing to the nearest safe space.
Naturally, an immediate investigation was undertaken, after which the president sent the tweet shown here.
And with that, I will bid you farewell for the week. Don’t forget, we are offering a fully guaranteed trial to Compelling Investments Quantified. You have no risk when you give it a try today.
It’s investing without the stress.
Until next time,
Managing Editor, The Passing Parade
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