successful investing - influence bias
DESCRIPTION
Continuing our series on how not to be your own worst enemy. This presentation looks at influence bias.TRANSCRIPT
Successful Investing
“How not to be your own worst enemy”
Influence bias
Introduction1. We want certainty
2. We want to know what we will get
So:
3. We look for winners
4. We listen to experts
5. We hear what we want to hear
Certainty• You are ill, you go to two GPs
• First doctor says “I know what this is”
• Second doctor says “Not sure what this is, but have these tablets”
Which one do you trust?
Certainty?• 90% of doctors think they diagnose
correctly first time
• In reality, only 20% get it right first time
Now which one do you trust?
Certainty?• Consensus forecasts of
economists have failed to predict any of the last four recessions
• 94% of analysts predications for 2 years earnings projections are wrong, over 12 months 45% are wrong
Which one do you trust?
Harmful investor behaviour
Investment over 20 years
Return
S&P 500 Equity index 9.14% p.a.
Individual investors 3.83% p.a.
Data Source: Investment Company Institute, Morningstar Associates and DALBAR. 20-year Period Ended December 31, 2010
Harmful investor behaviour
• We usually think we are above average and less likely to make mental errors
• The annual Dalbal studies highlights that we are prone to buy & sell at the wrong time
Reality
“We are our own worst enemies” – Benjamin Graham
The brain• Our brains have been refined by the
process of evolution
• Evolution occurs at a glacial pace
• Designed for the environment we faced 150,000 years ago
• They are potentially poorly suited to the information age we live in today
X & Y Brain
• X Brain – the older animal brain
• Y Brain – the new conscious brain
X & Y Brain• X Brian - the dominant part – i.e. the default
emotional brain
o Everything goes there first o Processes loads of information – quick and dirty ‘satisfying’ systemo Confirms information is correct because it wants it to be, i.e. emotions rule
the day
• Y Brain
o Conscious brain – but 99% of people give it backo Logical part – slow, deductive approach to problem solvingo Evidence and logic are needed to make it believe something is true
X & Y Brain
• X Brain can shut down Y Brain in times of high stress, for example if a physical threat is strong pure X
• Reality both systems are needed – X only would spend all day in bed considering the options
• Summary – X reacts first (i.e. emotion) and Y acts as a checker and sifter (i.e. logic)
X & Y Brain - summary• It takes five minutes for 5 machines to make 5
pies – how long does it take 100 machines to make 100 pies?
• Lily pads on a lake – doubles ever day and full after 48 days, how many days to be half full?
• Summary – X reacts first and Y acts as a checker and sifter
And finally• Have tendency to display traits that prevent us
from doing what we know we should do:
o Historically little volume transacts @ the bottom of the market, or for a time on the way back
o Unless one has pre-planned and pre-committed, opportunities will be missed due to dear induced paralysis
• Warren Buffett “be greedy when others are fearful and fearful when others are greedy”
Influence bias - summary
• Our brain craves certainty, & seeks confirmative information quickly
• Often emotion overrules logic, i.e. confirmative information doesn’t mean we are right
• Warren Buffett said “Investing is simple but not easy” - we can learn to make better investment decisions
Let’s enter the journey together…..