Insubordination does not help in the market
Updated
Our friend Hassan reads economic newspapers, websites and TV programs every day to keep track of the stock market conditions. All he reads and hears about is the boom in the economy and the rise in the stock market. Based on his belief that the market is taking an upward trend, Hassan started to invest in the company's share.
At the same time, Hassan begins to read the reports of the brokerage firms that made "Buy" recommendations for the company "S" shares with confidence and enjoyment. When it comes to some news and reports that the stock "X" is overvalued, it taps the facts and explains the excessive price of the stock as a reflection of the good performance of the company's management.
"Hassan" asks others about their opinion of the company "Q". If they agree with him and talk positively about the company, talk to them in more detail, but if they disagree with him and have a negative view of the company, Another shared his views on "X".
"Good" ignores all cautionary signals pointing to the direction of the "X" to the downside, but the strangest is that when the stock price continues to fall steadily, the "good" mind tends to fall back at a time when the share price is flourishing and believed That the arrow has already reached the bottom and is now preparing to restore its former glory.
The stock lost 5%, became 10% within days before its loss reached 25% by the end of the month, and Hassan stuck to it and did not want to abandon it. After several months it lost almost all of its money because it was the victim of a trap where most investors "Confirmative bias". Hassan looked only at the opinions and evidence that supported his decision to invest in S. and ignored all evidence that questioned the validity of his decision or the feasibility of his investment.
"Confirmation bias" is a psychological phenomenon that explains why we tend as human beings to search for information that confirms our current views and beliefs while ignoring those that may refute these views and beliefs.
Quite simply, many of us tend to prefer information that confirms their ideas or assumptions, regardless of the validity of this information.
At the same time, Hassan begins to read the reports of the brokerage firms that made "Buy" recommendations for the company "S" shares with confidence and enjoyment. When it comes to some news and reports that the stock "X" is overvalued, it taps the facts and explains the excessive price of the stock as a reflection of the good performance of the company's management.
"Hassan" asks others about their opinion of the company "Q". If they agree with him and talk positively about the company, talk to them in more detail, but if they disagree with him and have a negative view of the company, Another shared his views on "X".
"Good" ignores all cautionary signals pointing to the direction of the "X" to the downside, but the strangest is that when the stock price continues to fall steadily, the "good" mind tends to fall back at a time when the share price is flourishing and believed That the arrow has already reached the bottom and is now preparing to restore its former glory.
The stock lost 5%, became 10% within days before its loss reached 25% by the end of the month, and Hassan stuck to it and did not want to abandon it. After several months it lost almost all of its money because it was the victim of a trap where most investors "Confirmative bias". Hassan looked only at the opinions and evidence that supported his decision to invest in S. and ignored all evidence that questioned the validity of his decision or the feasibility of his investment.
"Confirmation bias" is a psychological phenomenon that explains why we tend as human beings to search for information that confirms our current views and beliefs while ignoring those that may refute these views and beliefs.
Quite simply, many of us tend to prefer information that confirms their ideas or assumptions, regardless of the validity of this information.
Note
For example, if you assume that you have an early idea of Apple's stock as an excellent share and worth buying, you will often seek to selectively select the news, reports and analyzes that support that belief. Therefore, when you see reports of a significant drop in iPhone sales or any other negative news, you will ignore them because they question the validity of your decision, which makes you uncomfortable.Ignoring these facts leads you to hold on to the stock even in the presence of many signs that indicate that the performance of the company and consequentially the price of its share on the way to decline. (Please, be aware of the fact that this is just an example and not an opinion in the "Apple" stock).
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How does Warren Buffett do it?- It is very difficult for most of us to face the phenomenon of "affirmative bias". This is probably because we must face ourselves with uncomfortable facts and admit that we can very well be wrong. But big investors are well aware of this psychological phenomenon, and try to avoid it as much as possible. This is what American investor Warren Buffett used to do.
- Buffett overcame this phenomenon and did not miss her when he invited one of his most critical critics - Doug Cass - to attend the annual meeting of his Berkshire Hathaway shareholders in 2013.
Doug Cass is a hedge fund manager and was famous in financial circles after criticizing the $ 112 billion merger of Time Warner in January 2001 as a bad deal. Days proved his health. In 2009, the value of EOL fell to only $ 3 billion.
- Most of us would prefer to avoid embarrassment to the conference's over 35,000 attendees, as well as millions of event investors from around the world. But Buffett deliberately called Doug to listen to his views on weaknesses he might see in Berkshire Hathaway's investment and management plans.
- Buffett wanted to listen to criticism and dissent so he could act quickly and back away from any bad plan or decision. In other words, Buffett did not seek the views of a person who confirmed the validity of his decisions or praised his insights; he wanted someone who had the ability to challenge his decisions, refute them, and clarify their shortcomings. That is why Cass called for the meeting in May 2013.
- The "KAS" attended the conference and did not disappoint the investors present who were expecting difficult questions from him. Spoke with Buffett publicly about a range of thorny issues, including the extent to which Berkshire Hathaway's size and growing influence have affected its ability to continue to overcome the market.
He also spoke to him about his plans for what the company's management would be after retiring due to its aging, and about the expected reduction in the size of the Fed's quantitative easing program.
- In response to these questions, Buffett replied that Berkshire Hathaway was still disciplined in its purchases and would use its substantial liquidity to make good deals for shareholders. At the same time, Buffett did not give a clear answer on his plans for the company's future in the post-retirement period. Finally, Buffett expressed confidence in the Fed's ability to manage monetary policy.
- The witness is that Buffett, whether he agreed to any of the views of "Cass" or not, he showed his keenness to challenge and test the validity of his decisions and escape from the "affirmative bias" whatever it costs.
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- "Charlie Munger" vice president of "Berkshire Hathaway", the right hand of "Warren Buffett" also has a tough attitude towards the phenomenon of ascendancy, which learns how to face from the world famous "Charles Darwin.""Charles Darwin used to say that whenever he came to a conclusion that contradicted another conclusion he was proud of, he would force himself to write the new result within 30 minutes, otherwise his mind would reject conflicting information, Transplantation The human being naturally tends to adhere to his beliefs, especially if they are reinforced by experience. "
- As we all know, Berkshire Hathaway led by Buffett and Munger is one of the most successful investments holding companies in the world. If you invested $ 1,000 in the company's shares in May 1980, the value of these shares would have been $ 614,000 in October 2015. This is an annual return of 120% for 35 years.
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Geniuses but ...- Long-Term Capital Management was founded in 1994 by John Meriwether. Meriwether worked as head of the brokerage firm at Salmon Brothers until 1991 and was responsible for nearly 80 percent of the company's global profits from the late 1980s to the early 1990s.
- At the beginning of the last decade of the last century, Meriwether left the company and succeeded in persuading the winners of the Nobel Prize in economics, Myron Scholes and Robert Merton, to join him as partners in his Long Term Capital Management.
- The new company achieved immediate success, and the yield on its holdings of bonds reached 21% in 1995, before rising to 43% and 41% in 1996 and 1997, respectively.
- What happened is that the Nobel winners have built a complex mathematical model to predict prices, and it seems to everyone that these two men can not make a mistake. Critics of the model, however, point out that it will only work efficiently in a perfectly rational market. If panic spreads in the markets, the company will lose billions of dollars.
- The company did not pay attention to skepticism about the ability of the model to deal with market panic, but not long before Russia stumbled into paying its government bonds on August 17, 1998, a state of panic began to dominate global markets, The company's loss of billions of dollars.
- By the end of September, the company's market value had fallen from $ 2.3 billion to only $ 400 million and was on the verge of collapse. At that time, a tripartite alliance of AIG, Goldman Sachs and Berkshire Hathaway offered to buy the company for $ 250 million and pump $ 3.75 billion into it.
- The offer was very weak, and Buffett was said to have given Meriwether one hour to accept the offer. But time passed without agreement, and eventually the Fed intervened to rescue the company to avert a collapse in world financial markets in 1998.
- Although the company succeeded in building a model genius, but its failure to the phenomenon of confirmation bias made it ignore the need to modify the model and the inclusion of the possibility of Russia's failure to pay its obligations in August 1998. This error destroyed the company in a moment.
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Do not be much smart!- Once you have formed a cohesive opinion and story about the circumstances, the investigative authorities tend to look for any evidence that supports their theory of how the crime occurred and ignore any other evidence - no matter how clear it may be - that may threaten them a perception of the crime. Lots of time in its construction. This is exactly what happens with the investor in the stock market.
- To avoid becoming an investor in this trap, you should look critically at the information and evidence that supports your investment options, and do not try to ignore evidence that supports conclusions contrary to those you have reached.
- Do not look for someone who agrees to talk to you about your investment decisions, and instead look for someone you trust who can play the role of what they call "Devil's Advocate." A person who can build arguments against your decisions, or give you evidence supporting other investment options that might be better.
The idea of the "devil's advocate" refers to the concept of "formal argument", a lawyer appointed by the Roman Catholic Church to athe rgument against laws enacted by lawmakers or members of the ecclesiastical council. It presents a skeptical opinion in search of apparent errors or inconsistencies in laws.
- Avoid questioning and directed questions. One of the biggest mistakes that an investor is making is asking questions in a format that makes him get the answer he wants, not the answer he needs. Some of us do - and in fact do not fool anyone but themselves - and include hints and references in the question aimed at directing the person to question a certain answer. Getting that answer leads to a false feeling that we are on the right track.
- It is not wrong for the investor to consider the evidence that supports his decisions and investment philosophy, but at the same time he must devote a large portion of his time to consider those that contradict his vision and decisions.
- Finally, do you want to be a successful investor in the stock market? So stop fooling yourself, and try to control your instincts and biases. "Warren Buffett": You do not need to be a rocket scientist. Investment is not a game in which the IQ in the IQ test gets higher than 160 degrees on that score of 130. "[/ b]
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