Investing with biases is like playing tennis using your weak side
In investing there are two major groups of enemies:
1) other people
Unbiasedness means focusing on the actual data and established causal relationships, while actively avoiding other people’s power of persuasion, and mitigating adverse affects and cognitive blindness due to psychological biases.
Focus on facts not opinions
With unbiasedness I mean not caring about how and why you came into a holding, only what its future return characteristics are. With unbiasedness I mean not letting your investment process be unduly affected by history, by friendships, by juicy sales pitches, by half-truths, by wishful thinking, by group-think and reluctance to speak up.
With unbiasedness I mean both freedom from external pressure and irrelevant information, and systems for managing your own cognitive biases such as herding/social proof, availability, anchoring, confirmation, hindsight bias etc.
Unbiasedness – the holy grail of investing
I admit I often label traits being of paramount importance or indispensable. Unbiasedness is no exception. If your investment process is biased rather than founded on reality, you inevitably will make worse decisions. Most likely that will in turn lead to lower or even negative returns.
If you let yourself be swayed by charismatic snake oil salesmen, online stock forum “friends”, brokers or incumbent owners you’re more likely than not to be positively biased and paying too much. Sure, you can get lucky, but you can also end up buying IT companies at the peak of the 1999-2000 technology bubble; or mortgage brokers, house builders and banks in 2007.
Similarly, your own biases can play tricks on you. Since you want to be rich, since you want stocks to rise, since you only have limited research resources you hope whatever stocks you investigate will rise. You invest in the first companies you come across and then adjust your models until the stock is a strong buy. You keep adjusting if the price surpasses your initial target…
Unbiasedness is the holy grail of investing, since it’s so difficult to attain. And maintain.
Your mind keeps blinding you, fooling you with plausible narratives, telling you to conserve energy (preserving your homeostasis), encouraging you to pursue the path of least resistance, of following the herd, of always being contrarian, of simply confirming what you already think, of hiding news to the contrary from your attention. Unless you have the right infrastructure in place you won’t even suspect you’re biased. That’s part of the very definition of bias. Even if you do pay lip service to unbiasedness by superficially entertaining the opposite side, you’re most likely to just pat yourself on the back with a congratulatory “I checked so at least I’m not biased”
Carefully weigh all facts and arguments against each other
Form your investment opinion with a minimum of external influences
Make decisions and take action with freedom of mind.
Stand up to yourself your ideas
as long as the data support them
but not longer
In my book about 15 years at the best performing hedge fund in Europe over a decade, I list 50 rules of investing.
This post is one in a line of articles detailing and explaining some of my most important insights from that time. Taken together I believe they will make for a useful and inspirational reminder for evolving and consistently improving your investment habits.
Whenever having a bad experience in the markets, or exhibiting signs of hubris after a lucky streak, refer back to these twelve ideas, thus combining your own experience with mine to maximize your investment wisdom.
Unbiasedness means focusing on facts, actively subduing any psychological biases, using check lists and best practices to counter greed and wishful thinking.
Unbiasedness also means shunning group think, decision by committee and dangerous exposure to biased people with agendas. Unbiasedness means being independent, even of yourself through the use of best practices including checks and balances of yourself.
Be truly independent
Neither a crowd follower
Nor a die-hard contrarian
Unbiasedness is the ninth article in my 12-part series of TAOS – The Art Of Sprezzatura. You can buy the artwork here. If you missed the previous eight articles you can find them here: Strategy, Patience, Resilience, Endurance, Zeal, Zen, Agility and Temperateness. Three more are coming over the course of the next three weekdays.
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