A Quick Guide To Losing Money In The Market

The path of least resistance is the path of the loser.” H.G. Wells

Wells’ above quote could be applied to a multitude of things.  For myself as an investment manager, the risk of falling prey to confirmation bias and shallow analysis can be dangerous.  In the confirmation bias, people tend to favour/believe information that supports their current views & hypotheses.   

Being intellectual honest about our thesis and rationale for investments is critical to success. How can we become better investors if our thought process isn’t consistently challenged?  Are we taking the path of least resistance in our analysis and analytical rigour?  Here are a few signs to watch out for:

  1. Scouring for confirming views: Jason Zweig once wrote that, “…people are twice as likely to seek information that confirms their beliefs then they are to consider evidence that contradicts them.”  Do you carefully considering opposing views?
  2. Easily shaken out by fluctuations:  How can you have faith to ride out short-term fluctuations without the confidence of a full vetted idea?  While there is nothing wrong with having tight stops and loss disciplines, it is a whole lot easier to be shaken out if you don’t trust the idea.
  3. Lack of conviction: What is the point of holding a stock that you don’t have high conviction in?  I’d rather own an index fund than a stock I don’t love.  Investors lukewarm on a holding end up becoming “long-term investors” as they are inevitably under water.
  4. Loss Aversion:  Does your original investment thesis still hold?  If not are you only holding as you are reluctant to take a loss?  Cut bait and get out.  These situations lead to investors taking on more risk due to their loss aversion.

Obviously a well vetted idea doesn’t guarantee success, however a lack of reasonable diligence is inexcusable.  Making money is too difficult to lose it on stupid decisions.  Take a look at your holdings today and ask yourself why you are still holding it?  Does it still meet your original criteria?

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