You are your greatest enemy to success in this game

After recently completing the CFA program I found that it offers only a handful of topics really useful for investment success. Ironically, the heaviest weighting of material is focused on financial statement analysis which in my opinion is the most useless. The good stuff is found in level 3 of the program...I'm talking about behavioral finance. Prior to reaching level 3 I was aware of most of these concepts but actually having to study them helped me to be aware of them even more. Practically every mistake I have made in the market was attributed to one or more of the "traps" that are discussed. I know I've touched upon this topic before at least once, but I gotta tell you, it’s such an important topic and I'm seeing it happen first hand with today's retail investors. Here's a few of the most prevalent traps out there.

Recalability trap - letting a past bad experience in the market (such as a crash) influence your behavior. (This may cause you to be overly cautious).

Loss aversion - refusing to accept a loss when you should and willing to take even bigger risks to try and make up for loss such as letting it ride or doubling down (this is a form of ego defense).

Anchoring - refusing to depart with an existing point of view when the evidence is piling against this view (again, a form of ego defense because to most people, change their view would mean to admit being wrong and therefore not intelligent)

Herding - blinding following a popular trend or market guru

Confirming evidence trap - selectively seeking out opinions and facts that confirm your existing point of view and scoffing at others who oppose your view.

Overconfidence - thinking you are better than you really are just because you had recent success in the market (this is my version of overconfidence not the CFA's).


Many times have any of your losing trades or missed opportunities were attributed to at least one of the above traps? I can tell you for me it's gotta be close to 90%. Anchoring and confirmation evidence traps is something I'm seeing so much these days.
Take for example the bearish/skeptical attitude for what I believe is the large segment of the retail investor community. You don't think so? Take a look then at the following 2 articles. The first one is bearish the second one bullish. Then look at the comments section to see how retail reacted to them.


http://www.marketwatch.com/story/stock-market-may-collapse-again-gundlach-says-2009-09-09?dist=bigcharts

http://seekingalpha.com/article/159494-the-recession-is-over


We've become a nation of permabears it seems and it's because of the recalability trap, anchoring and confirmation evidence trap. The other 2 traps are usually what you see near the top of bull markets although bearish herding also happens. Most of these retail bears I see out there likely did not start out as bears. When you first found out about the stock market and wanted to "play it" I bet you would look for stocks to buy am I right? Chances are you never heard of shorting or bear etfs. So, I hypothesize that a lot of the bears I see out there at one point were in essence bulls who got burned by the market and then turned to the "dark side". It seems

Do you hold a grudge against the market because you got burned before?

Let it go.

Do you think you are know more than the market and refuse to accept a loss because you think the market is "wrong"?

Most of the time you will learn the hard way that it is you who is wrong.

When you read an article that is contrary to your point of view how do you feel?

If you are skeptical even before you start reading, feel anger, resentment or scoff in anyway you are biased and you suffer from a form of confirmation evidence trap and will be prone to anchoring.

I'm not one to tell people what do to when it comes to the market...I rarely discuss the market with my soon to be wife or friends unless they ask me and I also know that there's more than 1 way to approach the market successfully but I believe the following 2 "philosophies" are paramount to success no matter what strategy you use.

1) Accept the market for what it is not what you want it to be.

2) Have no allegiance to any side of the market except for the side that is going to make you money. This seems like such a no brainer yet its mind boggling how very few people actually approach the market this way. Once you make this your goal you will seek out any and all types of opinions and information and not just the ones that confirm your view because in order to maximize your chances to make money you need to seek "the truth" and that means examining ALL points of view and deciding honestly who's right. Once you can just "let go" and be honest with yourself I'm telling you, you will be so much better off in this game. It's not going to guarantee success but it will put you in the right direction to get it. Once you look at the market this way, you won't look at is as an adversary or with resent but rather as as a place where there is an endless ammount of opportunities to make unlimited ammounts of money.


So why am I writing all this? Am I trying to be some sort of condescending know it all? Not at all. Writing this is very beneficial for me.

When it comes to investing I basically have a dual personality in me. One side is the cool, calm, calculating, intuitive and brutally honest part of me. The other side is the George Castanza which is neurotic, paranoid and impulsive. When I write I feel like I am releasing the former side of me and I find it useful to read these posts when at times the George Castanza side of me tries to take over. I've been doing a good job lately at keeping George at bay....but he's never totally gone.

George is getting frustrated!