What does thinking have to do with investing?
On the face of it, that seems like a silly question. After all, investing is about managing our money. And if you don’t manage with your head, how do you manage?
Unfortunately, too many people manage with their hearts. They invest in the market because they feel good about the market; they pull out when they’re worried. They run away when they should stand pat, and they rush in when they should be more careful. Jesse Livermore famously noted that it wasn’t his buying and selling that made him money, it was his sitting.
But using your head—being an intelligent investor—isn’t easy. There are lots of ways our emotions stop us from thinking. We’re subject to biases and fallacies that color our perceptions.
One of the most prominent is “recency bias”: the notion that the world is as it is because it must be that way. We cannot imagine the world to be other than it is. After all, each day is largely like the one before. We get up, go to work, come home, and go to sleep. Lather, rinse, repeat.
But while the day-to-day details of our lives are largely the same, the world changes—radically—over the years. At present, Apple is the biggest company in the world. Ten years ago it was Exxon. Before that it was GE. Before that, Microsoft. Who’s next? Who knows!
Investors need to focus on their own long-run goals and avoid running with the herd. It may seem like there is safety in numbers, but all too often, that herd is headed off a cliff.
Douglas R. Tengdin, CFA
Chief Investment Officer
Leave a comment if you have any questions—I read them all!