5⃣Biases that cause bad investing decisions
and what you can do about them🧵
and what you can do about them🧵
1⃣Overconfidence Bias
Investors' confidence in their investment decisions is MUCH higher than the actual accuracy of their investment decisions
This is especially prevalent in new investors
I personally followed the Dunning-Kruger effect perfectly
Investors' confidence in their investment decisions is MUCH higher than the actual accuracy of their investment decisions
This is especially prevalent in new investors
I personally followed the Dunning-Kruger effect perfectly
The 'cure' for overconfidence bias is experience
I lost money on several "sure thing" stocks
I've since learned to:
1⃣Use checklists/journals/watchlists
2⃣Invest in 0.5% increments
3⃣Add at better value points
4⃣Accept that I'll still be wrong a lot
I lost money on several "sure thing" stocks
I've since learned to:
1⃣Use checklists/journals/watchlists
2⃣Invest in 0.5% increments
3⃣Add at better value points
4⃣Accept that I'll still be wrong a lot
https://twitter.com/BrianFeroldi/status/1275752033325330433?s=20
2⃣Self-Attribution Bias
Investors credit themselves when things to well
Blame others when things don't
Investors credit themselves when things to well
Blame others when things don't
Acknowledge that luck is a part of investing - PERIOD!
A good investing system:
1⃣ Increases your odds of being lucky
2⃣Decreases your odds of being unlucky
Below are the odds that a random stock will succeed
If you're doing better than these odds, your system is working!
A good investing system:
1⃣ Increases your odds of being lucky
2⃣Decreases your odds of being unlucky
Below are the odds that a random stock will succeed
If you're doing better than these odds, your system is working!
3⃣Recency Bias
Investors extrapolate the recent direction of a stock/stock market indefinitely
Investors extrapolate the recent direction of a stock/stock market indefinitely
Study market history to fight recency bias
(@InvestorAmnesia is a wonderful resource)
Committing to dollar-cost averaging helps a lot
(@InvestorAmnesia is a wonderful resource)
Committing to dollar-cost averaging helps a lot
4⃣Anchoring bias
Investors overemphasize an initial piece of information
You find a stock at $10. You don't buy. It jumps to $20.
You don't buy at $20 because you could have bought at $10, even if it's still a great buy!
You tell yourself "I'll buy when it gets back to $10"
Investors overemphasize an initial piece of information
You find a stock at $10. You don't buy. It jumps to $20.
You don't buy at $20 because you could have bought at $10, even if it's still a great buy!
You tell yourself "I'll buy when it gets back to $10"
Solution:
Understand that winners tend to keep on winning and losers tend to keep on losing
If a stock is up because management is executing well, ask:
"If I buy today, can I still win?"
If you bought $AMZN in 2018, you've still made a lot of money!
Understand that winners tend to keep on winning and losers tend to keep on losing
If a stock is up because management is executing well, ask:
"If I buy today, can I still win?"
If you bought $AMZN in 2018, you've still made a lot of money!
https://twitter.com/BrianFeroldi/status/1362429326155796481?s=20
5⃣Loss aversion bias
Investors own a stock that is down and the company isn't executing
Losses hurt 3x more than gains feel good
Investors tell themselves: "I'll sell when I get back to even"
Investors own a stock that is down and the company isn't executing
Losses hurt 3x more than gains feel good
Investors tell themselves: "I'll sell when I get back to even"
My solution:
Create rules for selling losers and stick to them
My #1 rule: Sell if my original thesis is busted
Aka.....I was wrong!
(This is why investing journals are so helpful)
Other reasons I sell:
Create rules for selling losers and stick to them
My #1 rule: Sell if my original thesis is busted
Aka.....I was wrong!
(This is why investing journals are so helpful)
Other reasons I sell:
https://twitter.com/BrianFeroldi/status/1341560911023267840?s=20
Books help a lot
Some great books on money & psychology
Poor Chalie's Alamanac - Charlie Munger
Predicably Irrational - Dan Ariely
Psychology of Money - @morganhousel
Thinking Fast & Slow - Daniel Kahneman
Your Money and Your Brain - @jasonzweigwsj
Some great books on money & psychology
Poor Chalie's Alamanac - Charlie Munger
Predicably Irrational - Dan Ariely
Psychology of Money - @morganhousel
Thinking Fast & Slow - Daniel Kahneman
Your Money and Your Brain - @jasonzweigwsj
Charlie Munger's talk on human misjudgment is brilliant and is infinitely re-watchable
• • •
Missing some Tweet in this thread? You can try to
force a refresh
