Michael: I don’t know anyone who could get through the day without two or three juicy rationalizations. They’re more important than sex.
Sam: Ah, come on. Nothing’s more important than sex.
More business news
Krowds: Control from a new angle
The Krowds video app lets multiple people at the same location submit footage from their own point of view.
‘Flywheel’: Take a taxi without cash
Formerly known as Cabulous, this app lets you hail a cab, check wait time and pay for it with a credit card.
Sony urged to cut entertainment stake
Investor Daniel Loeb says Japanese firm should focus on electronics unit.
Michael: Oh yeah? Ever gone a week without a rationalization?
— “The Big Chill” (1983)
In my last column, we discussed my annual rite of Mea Culpa. That’s where I look back at the prior year to evaluate what I got wrong and why. It is a humbling experience designed to make me a better investor, and I have been doing it — in public — for several years. Numerous readers have told me that this is a rarity in the world of finance.
But every year I hear from a small segment of active traders who misread what the discussion is about, seeing it as an invitation to brag about their best trades. Astonishingly, these e-mailers have all significantly outperformed the markets over the years, putting up fantastic return numbers. They never seem to have a losing trade. They sold Apple at exactly $705 and bought gold precisely at the bottom. Even more amazingly, they got out at the market top in October 2007 and bought in at the exact lows in March 2009.
The polite term for these people is “fibbers.” Personally, I say it’s lying.
Mathematical probabilities make these claims of uniformly spectacular track records extremely unlikely. And what I find most intriguing is that these Pinocchio traders (as I call them) are not really lying to you or me, but, rather, to themselves.
Little white lies are told by humans all the time. Indeed, lying is often how we get through each day in a happy little bubble. We spend time and energy rationalizing our own behaviors, beliefs and decision-making processes.
As investors, we want to believe we are smart, insightful and uniquely talented — even though we often fail to do the heavy lifting, put in the long hours, and make the uncomfortable but necessary decisions to achieve success.
But self-deception is especially costly when it comes to investing. So let’s consider some of the lies that a lot of you may be telling yourselves and the impact they may have on your portfolios.
You know what your investment returns are. You would be surprised at how few people actually know what their returns are. Even fewer understand their performance relative to a benchmark.
According to a study of online investors by Markus Glaser and Martin Weber, “The correlation coefficient between return estimates and realized returns is not distinguishable from zero.” In other words, what we think our investment returns are and what they actually are have literally nothing to do with each other.
It is not that complicated to correct this. Set up a simple spreadsheet using Microsoft Excel or Google Drive or one of the available online tools. Keep careful records of your portfolios, cumulative and YTD returns, and you will avoid the “performance delusion.”
You can predict the future. You may not say you believe you can forecast what will happen next year, but you certainly behave that way.
Loading...
Comments