In market draw downs, it is natural for investors to seek out others that they deem professionals for advice. Those of us “lucky” enough to be in this business day after day become pillars of strength upon which those with equity exposure lean. I am in touch with close friends and and acquaintances alike during these selloffs and I always try to give them my unbiased thoughts on overall market direction. It is after all their retirements, trading accounts and other funds at risk that they have worked so hard for.
This morning after talking with a friend, I took into consideration that term, “unbiased.” Given that I do this each day and I am personally invested from the long side, is it even possible for me to offer an unbiased viewpoint? Is it possible for me to offer an opinion on overall market direction that is free of any and all personal biases?
To be a successful investor/trader it is of critical importance to understand common human cognitive biases. These are our “out of the box” hardwired shortcuts which can serve us well in other aspects of life, but must be overcome if we want to achieve any level of investing success. One in particular that is massively difficult to kick is Confirmation Bias.
Confirmation bias is the natural human tendency to seek or emphasize information that confirms an existing conclusion or hypothesis. In plain speak, we seek out data and explanations which agree with our own beliefs, and ignore data that differs from our opinion. When a friend asked me this morning if we should pull back long equity exposure, I immediately said no. Am I at fault, suffering the pitfalls of being hardwired to give advice that simply confirms what I believe is going to happen?
Because I have “been around” I am familiar with Confirmation Bias and a host of other biases that plague humans on their quest to investing success. Even having this understanding (and I feel a good understanding of market direction) I am certain I committed an error, a shortcut that could lead me astray when attempting to give unbiased advice. That is how powerful these inherent hard coded biases can be.
Charlie Munger, the Vice Chairman of Berkshire Hathaway and Warren Buffett’s business partner, said: “Rapid destruction of your ideas when the time is right is one of the most valuable qualities you can acquire. You must force yourself to consider arguments on the other side.” While I hate being wrong when it comes to the market, it is one half of this business. Leaning to live with it and move on once your theses have found to be incorrect is a massive undertaking. Those that can will be rewarded on the other side.
I hope to see you there.
OC