Thread by @TihoBrkan

1/ Weekend summary time, so let's focus on the mental state of investing. For some of you, maybe not as fun as analyzing the charts, but it is far more important.

You've probably heard from many wise people in this business that as humans, we aren't wired to be good investors.

2/ As a matter of fact, due to being such emotional creatures — ruled by panic & greed — the public markets extreme volatility is our own behavior of uncertainty, acting on emotions, gambling and being totally irrational.

"In investing, you are your worst enemy," they say.

3/ In our field of investing & finance — in my opinion — unprofitable investors are easily spotted by a variety of traits. I will explain several of them.

Why is this useful? Well, one of the ways to become profitable is to find the few successful ones and learn from them.

4/ So let's start. One of the important traits a successful investor — who is consistently profitable — usually posses is the ability to think in opposite extremities.

Basically a bipolar analysis. Why is this important?

5/ Well, F. Scott Fitzgerald once said: “The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function.”

6/ Another famous quote in the field of investing that is often used by the very consistent investors goes:

"Strong opinions, weakly held."

7/ So many investors have downfalls because they believe the narrative and fall in love with their analysis.

When beginners speculative in assets such as cryptocurrency, you will rarely see "the ability to hold two opposed ideas" from such investors?

8/ Same could be asked, not just of crypto investors, but of those chasing super high growth companies or investing in the next Silicon Valley startup.

They are basically a part of a cult. True believers, which would never even bother analyzing the other side of their bet.

9/ Another undesired trait in the field of investing is the so-called illusion of validity.

Basically, everywhere you look, you only see what you want to see. The most famous blog guilty of this, in the field of finance, is probably @zerohedge.

10/ No matter what is going on, they can spin it into a bearish view.

And yes, it's business for them. Negative news attracts more attention and attention in social media = income (advertising, etc). This is their job.

11/ However, you are an investor. You have to be open-minded. You should NOT fall into a perma-bull or perma-bear state.

During every expansionary period, there are plenty of reasons to worry. That is why they say markets climb a wall of worry.

12/ Worrying is fine, but entering a state of perma-siding, the illusion of validity, or in plain English only seeing negativity in a bull market or visa vera — those could be very hazardous to your state of mind. For the beginners, it could even mean NEVER reach profitability.

13/ Moving along, another sign of an inexperienced investor is when you see them talking up their book.

They fall in love with the fast-growing companies they own, a precious metal they hold, a digital currency they believe in has better technology then all others, etc, etc.

14/ "Strong opinions, weakly held."

Do not fall in love with the SaaS or FANG companies you own, the index fund that's been rallying for a decade & kind to your P&L, the promise of making 100X on the next Silicon Valley unicorn.

Those investments don't love you back.

15/ Believe in their story & narrative, for as long as the price moves in the right direction. But when the bull market ends and when the judgment day arrives, as it has during every previous cycle — the market darlings always disappoint the most.

16/ Those who fell in love with their investment book, and forget about that risk management is more important than love, will be the most heartbroken.

17/ Another mindset hazardous to your success & profitability is anchoring or single factor decision making.

In plain English, one piece of information that you have a bias towards and let it affect your decision making — instead of taking onboard everything in front of you.

18/ I see this all the time from the macro newsletter guys.

They got this amazing analog from 1929 or 1987 that tells you how the current market environment is following it super closely, and therefore we are about to repeat the mega-crashes of the past.

19/ Or the way some macro analyst working for a financial firm found out that if you make the yield curve invert, and act as a lead indicator 12 months into the future, you will be able to know what the VIX will do next year.

20/ Framing data also falls into anchoring.

Basically framing a chart of various indicators which work perfectly from, say 2006 until today... but if you go further out, that correlation breaks down. They won't tell you it's misleading, so you have to do your homework.

21/ Then there is a bias blind spot. This is what happens to more advanced investors. Let me give you an example of how this will play out into the medium term future.

You have investors who have been correctly bullish during this bull market.

22/ They taunt perma-bears, laugh at them, poke fun at their research and totally ignore what they have to say. That works until it doesn't and when the judgment day arrives for the bull market, they will have the last laugh.

23/ Because these guys — who are actually quite smart — have been consistently wrong during the bull market, the person who suffers from bias blind spot will eventually fail to heed the important message from their research or advice.

Keep an open mind at all times.

24/ In-group bias is another form of not having the ability to entertain both sides of the coin, bipolar thinking & being open minded.

E.g. The mastermind group of investors you talk with & follow are all-in on crypto, SV startups, FANGs, US only index funds, etc.

25/ My advice is to follow as many people who you disagree with, that you also follow who you agree with.

Make your social media feed balanced. You don't need so-called "yes-men" around you, giving you confirmation bias all the time.

26/ Let someone challenge your book and narratives you hold, the investment themes and ideas that you think will flourish forever — probably won't. So it is very healthy to see the other side of the argument.

27/ Your job as an investor is not to be right, but to be profitable. These people, who you disagree with, will help you apply risk management just in case they are right and you are wrong.

After all, the primary job of an investor is to NEVER lose money. Just ask Mr. Buffett.

28/ The curse of knowledge. The super high IQ.

You got people in this field who are so smart, they think they can beat the market and outsmart it every single time. However, the old saying on Wall Street is:

"Markets are never wrong, people often are."

29/ The curse of knowledge, as they call it, is apparent with those who have come from other high-level professions and have been tasked with becoming profitable in the game of investing — where things are NOT rational and markets act based on emotions of fear & greed.

30/ Dentists, surgeons, doctors in general, scientists, mathematicians, physicians, inventors, and your everyday genius tend to have this curse go against them very frequently.

31/ Furthermore, we've seen some of the smartest hedge fund managers blow up their accounts betting on recessions, betting against countries like Japan or China, betting on weather events or geopolitical outcomes. Majority of them eventually fail at investing.

32/ Every investor will eventually go through great winning streaks. Sometimes, it will feel as if everything we touch turns to gold. For the very experienced ones, they will understand this phase comes and goes — so they won't be phased much.

33/ However, the beginners will enter what we call overconfidence effect. They will think they are the chosen one, their system of picking stocks, timing indicators, using options strategies and asset allocation models is far superior.

They will claim they've got the holy grail.

34/ These hot streaks, usually more apparent when you're trading on the right side of the trend (i.e. you're a bull in a bull market, you're a miner in a commodity boom, you're a startup whizz in a tech bubble), won't last forever.

35/ Regardless of the advice & wisdom I share, you will have to learn the hard way. We become mesmerized by what we think is a skill, and instead, it's just luck & timing.

36/ Finally, to touch upon recent bias. This is especially important to the young & inexperienced ones amongst us. They enter into the system with a view of what has worked recently, has always worked throughout history and will, therefore, continue to work well into the future.

37/ Experience is important, however as Ray Dalio always discusses: events that could occur in the future may not have happened in our lifetime, so it is important to learn from history.

"Those who cannot learn from history are doomed to repeat it."

38/ Examples: new, fresh talent working on the desks of Wall Street hasn't even experienced a proper stock market crash. Majority of investors today, all over the world, have not experienced a bond bear market and the pain of rising interest rates. So forth & so on...

39/ As I do every single weekend, I just sat here and wrote all this out from my memory, without planning for it or thinking too much about it. I hope sharing some of the knowledge and my own experiences in the investment game helps you become better.

40/ Remember that we are our own worst enemy. So maybe the important questions in investing are not what is the valuation? Is the trend bullish or bearish? What's the target after it breaks out?

But how well do you understand yourself? How well can you control your emotions?

41/ I'm still struggling with this on a day to day basis. Attempting to control my emotions, reduce my speculation activity, improve my risk management and discipline to execute it without thinking, practice mindfulness, ability to stay open-minded & hold opposite extremities...

42/ ...in my mind at all times, no falling in love with a story / narrative / investment theme, having conviction & strong opinions but holding them as a weak hand, not being a perma-anything, forcing myself to change my mind when the facts change, not trusting single...

43/ ...factor evidence or having a bias towards one data point, being mindful of the way research analysts frame their idea & mislead us, making sure I don't have a blind spot — best done by reading material of those who you disagree with, which is very healthy...

44/ ...not being part of only one group (Silicon Valley tech, precious metals gold bugs, index fund FIRE people, short term forex traders, macro analyst & hedge fund wannabees, failed investors turned philosophers, etc, etc) but actually giving everyone 5 minutes of your time.

45/ I'll repeat it again:

"You are your worst enemy. Your job as an investor is not to be right, but to be profitable."