The Biased Investor: A Tinted View

How do you see the world?

Source: Pinterest.

Over 200 years ago Immanuel Kant pointed out that everyone looks at the world through his or her own particular lenses: we’re limited by our own minds. We can never know a thing-in-itself; we only know what we think about something. We can’t really see the world objectively; all we have are different shades of rose-colored glasses.

This can be a problem for investors. We tend to search for, interpret, favor, and recall information that confirms our preexisting beliefs. This is called “confirmation bias,” and it feeds our overconfidence. Suppose I think Coca-Cola is a great company and a stock worth buying. I will focus on its long-term 10% total return, its growing 3% dividend yield, its global revenue stream, its stable AA credit rating. But if I don’t like the stock, I’ll note its elevated PE ratio, it’s lackluster recent performance, its inability to diversify its products much beyond fizzy soft-drinks, and its byzantine management structure. In other words, there’s plenty to like or dislike on both sides of the issue.

If I buy Coke shares and they go up, I’ll tend to remember that; if they go down, well, you can’t win them all. Ditto if I sell them. Our tinted lenses paint the world in the way that we want to see it. We’re entangled with the facts that we’re trying to study. But there is a reality out there outside of the particular view we have of the world—and eventually, that reality asserts itself.

NASDAQ 1993-2016. Log scale. Source: Bloomberg

That’s why it’s so important to keep records and look back on a regular basis. In any diversified portfolio, there will be dogs and darlings. Some selections make us feel like geniuses; others will prompt us to ask, “What were we thinking?” Diversification is the compliment that ignorance pays to uncertainty. We don’t know the future; in many instances, we don’t even know the present or the past. So we want to invest in different types of asset classes in different industries up and down the capital structure—some with senior claims on cash flow, some with operational claims, some with residual claims. With the proviso that it rarely pays to overpay.

We can’t take off the glasses with which we see the world. But what we can do is recognize our limitations.

Douglas R. Tengdin, CFA

Chief Investment Officer

By | 2017-07-17T12:21:55+00:00 June 13th, 2016|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. –
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