Thread by @TihoBrkan

In Feb 2021 I returned back to @MikeBoyd's podcast with the plan to discuss mezzanine finance in the RE sector.

However, before discussing moving parts of mezz debt, due diligence & monitoring process, Mike asked my opinion on the state of stocks markets?

Valuable thread. 👇

Firstly, those interested, you can listen to the podcast here: businessoffamily.net/tiho-brkan-2

There was a lot covered in hindsight, but those who follow financial markets would have probably found the first part of the podcast either very interesting or too contrarian for their liking.

Here are two key quotes from the podcast, as I was taken in awe of the speculation frenzy in the tech & growth sectors:

"While it's easy to make money today and everything seems to be working, the question for very smart investors is to anticipate what's around the corner?"

"As a contrarian investor, you ride a certain wave until valuations become extreme for you, understanding that high valuations today entail future disappointing returns and so rather, you go and look for relative value elsewhere."

Why did so many investors get it wrong, again?

Answer: poor quality of thinking.

First, they Anchor. When anchored, your decisions will be heavily influenced by the first impression encountered.

Once the anchor is set, you will interpret all new information from the readjusted perspective. We can learn about the...

...anchoring effect, but it doesn’t mean any of us are capable of avoiding it. This is often why assets have investment cycles & most experienced investors repeat mistakes.

From school playgrounds to courtrooms & financial markets, anchoring is deeply rooted in human cognition.

Additionally, there is Confirmation bias, Social Proof, The Echo Chamber & Authority bias.

You probably heard of Confirmation bias because it is the big daddy of mental shortcuts where one selects only the info that supports their preexisting beliefs while ignoring alternatives.

People love a nice & quick mental shortcut, instead of doing independent thinking.

We favor quick decisions and often don’t take the time or energy to evaluate evidence "objectively".

We rarely ask what is Disconfirming Evidence? The other side of the coin? What am I missing?

When a few early birds buy a certain asset, they are doing it at attractive valuations with an ample margin of safety (in case they are wrong).

But as more & more people join the party, we have herd instinct develop, as they buy at any valuation.

Let's call this Social Proof.

All of a sudden everyone is buying popular tech & growth stocks — paying 20, 30, or even 50 times revenues for businesses that are not even profitable.

No one does any independent thinking precisely because everyone around them is making what seems to be "easy money".

Markets are counterintuitive, so as bullish narratives appear near major peaks contrarians muster courage to harvest their gains...

And more importantly, bearish narratives appear near major bottoms so contrarians muster courage to start planting seeds of the future returns.

If Confirmation bias is the big daddy, Availability bias is the big uncle of cognitive errors in decision making.

In life & in financial markets, the easier it is to recall examples or reasons the more probable or likely to succeed people think it will be.

But that's a fantasy.

In the post-Covid world, the easiest thing to recall and repeat was just how beneficial the conditions for "the new economy" stocks were.

The dreaded Availability bias makes sure our decisions let us down, resulting in lost money, because we place an outsized influence on...

...topics we can recall easily & swiftly.

Our subconscious mind tricks us into believing that if something is recalled easily & swiftly it must be important, even factual right?

What we don't like is the hard work of deep analysis — the opposite of recalling something easily.

An overwhelming majority of investors did not & still do not understand the intrinsic value of these popular companies.

Nor do they understand the cyclicality of their revenues.

They also didn't bother studying previous tech cycles, especially when valuations were at highs.

Instead of putting in the effort of developing independent thinking, what most do is repeat easily & swiftly recalled information, reinforced due to the circulation, creating Echo Chambers.

“If everyone is thinking alike, then somebody isn't thinking.” — Gen. George S. Patton

And finally, what psychologists call the Authority bias: our tendency to assign greater accuracy to the opinion of an authority figure.

A certain person running a popular growth ETF consistently appearing in media? If they are on TV every week they must know more than me, right?

But this story goes way beyond this Twitter thread, one which I hope you enjoyed reading.

Similar occurrences can be seen in the private equity & venture sectors. We also have reckless behavior in the real estate game.

Lessons are rarely learned, so investment cycles repeat.