- Predictions do not work as tomorrow is uncertain. We will only boast about things we have predicted right and talk nothing about the other half we got wrong.
- Skills can bring us moderate success. However, luck is needed to be a big success. (credit to Jon)
- We tend to credit our successes to good skills and blame our failures on poor luck.
- Some of us rely on luck (most unknowingly) by investing for high returns (and losses). A few of us will make big money but most of us will end up much poorer.
- Some of us deliberately limit the luck factor by choosing investment products with capital guarantee and guaranteed returns. None of us will make big money but none of us will be very much poorer.
- We need to know how much we can afford to lose (financially and emotionally) before deciding to be No. 4 or No. 5, or somewhere in between.
- We have many biases. The degree of success in investing or trading depends on how much we can keep our biases in check. No, we cannot remove our biases totally.
- Confirmation bias – we see what we want to see. We seek out evidence to validate our investment decision and ignore those that suggest otherwise.
- Availability bias – we are influenced by the things we observe. If people we knew made a lot of money through property investment, we will think that properties are the best investments in the world and develop a preference for it.
- Loss aversion bias – we want to be compensated for high returns before we decide to take the risk to invest. We often wait for markets move and show high returns before we want to invest. We are not interested if markets are not moving.
- Hindsight bias – we tend to say “I knew it” after an event has happened.
- Survivor-ship bias – we only get to hear stories of successes but many stories of failures were untold. See No 2 and No 3.
- Most us do not know what we want in life. We think we will be happier with more money.
Archives of “investment decision” tag
rss13 Things- Learned About Humans and the Financial Markets
- Predictions do not work as tomorrow is uncertain. We will only boast about things we have predicted right and talk nothing about the other half we got wrong.
- Skills can bring us moderate success. However, luck is needed to be a big success. (credit to Jon)
- We tend to credit our successes to good skills and blame our failures on poor luck.
- Some of us rely on luck (most unknowingly) by investing for high returns (and losses). A few of us will make big money but most of us will end up much poorer.
- Some of us deliberately limit the luck factor by choosing investment products with capital guarantee and guaranteed returns. None of us will make big money but none of us will be very much poorer.
- We need to know how much we can afford to lose (financially and emotionally) before deciding to be No. 4 or No. 5, or somewhere in between.
- We have many biases. The degree of success in investing or trading depends on how much we can keep our biases in check. No, we cannot remove our biases totally.
- Confirmation bias – we see what we want to see. We seek out evidence to validate our investment decision and ignore those that suggest otherwise.
- Availability bias – we are influenced by the things we observe. If people we knew made a lot of money through property investment, we will think that properties are the best investments in the world and develop a preference for it.
- Loss aversion bias – we want to be compensated for high returns before we decide to take the risk to invest. We often wait for markets move and show high returns before we want to invest. We are not interested if markets are not moving.
- Hindsight bias – we tend to say “I knew it” after an event has happened.
- Survivor-ship bias – we only get to hear stories of successes but many stories of failures were untold. See No 2 and No 3.
- Most us do not know what we want in life. We think we will be happier with more money.
Control your emotions
Allowing your confidence to be shaken can turn a simple losing streak into a terrible case of going bad. Keep your emotions in check. When you lose a pot or make a poor investment decision, get up, walk around the chair or take some deep breaths. Don’t lose your poise. If a trade, or if poker hand does not work out, walk away from the position/hand. Be confident enough about your ability to win afterwards.
Paul Tudor Jones: The Secret To Successful Trading
“The secret to being successful from a trading perspective is to have an indefatigable and an undying and unquenchable thirst for information and knowledge. Because I think there are certain situations where you can absolutely understand what motivates every buyer and seller and have a pretty good picture of what’s going to happen. And it just requires an enormous amount of grunt work and dedication to finding all possible bits of information.
You pick an instrument and there’s whole variety of benchmarks, things that you look at when trading a particular instrument whether it’s a stock or a commodity or a bond. There’s a fundamental information set that you acquire with regard to each particular asset class and then you overlay a whole host of technical indicators and that’s how you make a decision. It doesn’t make any difference whether it’s pork bellies or Yahoo. At the end of the day, it’s all the same. You need to understand what factors you need to have at your disposal to develop a core competency to make a legitimate investment decision in that particular asset class. And then at the end of the day, the most important thing is how good are you at risk control. 90% of any great trader is going to be the risk control.”
Cost of Mistakes
Overconfidence is a very serious problem, but you probably don’t think it affects you. That’s the tricky thing with overconfidence: the people who are most overconfident are the ones least likely to recognize it. We tend to think of it as someone else’s problem.
When it comes to investing, however, we all have a problem.
As we become more and more confident we become willing to take on more and more risk. Why? We start seeing risky behavior as, well, less risky. But the reality is that as the level of overconfidence increases, the cost of our mistakes increase as well. (more…)
Was Benjamin Graham Skillful or Lucky?
Last weekend’s Intelligent Investor column looked at the extreme difficulties of disentangling skill from luck when you are evaluating investment performance. It’s the topic of an excellent new book by Michael Mauboussin and a subject of endless fascination – and frustration – to investors.
We tend to think of the greatest investors – say, Peter Lynch, George Soros, John Templeton, Warren Buffett, Benjamin Graham – as being mostly or entirely skillful.
Graham, of course, was the founder of security analysis as a profession, Buffett’s professor and first boss, and the author of the classic book The Intelligent Investor. He is universally regarded as one of the best investors of the 20th century.
But Graham, who outperformed the stock market by an annual average of at least 2.5 percentage points for more than two decades, coyly admitted that much of his remarkable track record may have been due to luck.
In the Postscript chapter of The Intelligent Investor, Graham described “two partners” of an investment firm who put roughly 20% of the assets they managed into a single stock – a highly unusual departure for the conservative managers, who normally diversified widely and seldom invested more than 5% or so in any one holding. (more…)