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Three cognitive biases that stop me from making more money (from IKN440)

This was the main intro piece from IKN440, out last Sunday evening. I have redacted the names of companies used as examples as they're for subscribers. The rest as-is:


Three cognitive biases that stop me from making more money
What are your hang-ups as an investor? One thing is true without a doubt; we all have them. From there, most investors are aware of their weaknesses, the smarter ones work on them to get better at this crazy game. The individual investor (or even the fund manager, as long as they don’t work for Ray Dalio) tends to do this in the private sphere, it’s not easy to go around boasted about one’s weaknesses but what with being the author of a weekly publication that is based firmly and squarely on what I’m doing with my cash, coupled with my constant exhortations that “I am not you” and you should take the information provided here and use in for your own circumstances, I’m at the point where this subject has irritated me too long, it needs to be aired. Therefore today you get an overview of what I consider to be my main weaknesses as an investor (though as you’ll see, even though I consider one of them a sensu stricto weakness I’m not in any hurry to do anything about it). There are others of course (and if you feel like it, you’re very welcome to write in and tell me if you think I have other blind spots that have gone un-mentioned today), but for my taste and perspective there are three big ones and they go like this:

1) I am overly loyal to a story. In other words, I tend to hang around too long when a stock’s development isn’t going according to its original plan. The problem here is often on a personal, human level rather than statistical or (lack of) results-driven and starts with the way in which I prefer betting on companies with strong, stand-up management teams with integrity and values. Once in, my weakness is to consider my position as a sponsorship and a moral backing. So when things don’t go to plan (and in mining “when” is better than “if”, more depends on the size and gravity of the problem) I get a dose of loyalty. Maybe not such a bad thing, but the issues start with “overly loyal”, the header of this point. Sticking with a team is fine, being stubborn and backing good people that don’t deliver isn’t so great. The best example of this one in my open list at the moment is (redacted).

The solution, one I work on actively, is to be a bit harder-nosed about selling when the story as it unfolds fails to match (or sufficiently match) my own expectations when I made the original purchase. As evidence, the way I sold (redacted) before the drop kicked in has worked well.

2) I’m a sucker for a Value Trap. This one is well documented round these parts. The numberwonk in me filters through the sector, finds the stock that’s cheap “considering what it has” and buys it. The main problem is that even if it goes up with the market, it’s always going to be “comparatively cheap” to peers and my hang-up shines through, it’s tough to sell even at a profit. Value is one thing and I consider it a positive that I search and find such stocks. The issue is with “Trap”, the companies that don’t attract market attention or bids because they’re poorly marketed, they don’t develop their project as expected (see point one), they out-run retail holders by diluting benefit away using placements, those and a list of others. I’ve really been trying to work on this weakness of mine and on my list of open stocks today, perhaps two can be described that way (though I’d argue against), the potential culprits in order of likelihood being (redacted).

3) I find it difficult to buy a “bad” company. This subject grates on me for two reasons. A great example of this are the mid-sized copper producers such as (redacted) They’re so badly run, insular, shareholder unfriendly and spend half their time just on either side of the breakeven line that I find it painful to consider how they’re sold to people as quality mining vehicles. However, I’m also the first to recognize that they’re exactly the type of stock to own (maybe “trade” is a better word) when the underlying market for copper makes significant moves in either direction. It’s partially due to their high cash cost and partially due to the very fact they’re run by mediocrity that makes them great trades if there’s a big move in copper (either direction, going long is most accessible to us retail for Canadian listed stocks), but try as I might I just can’t get myself to go long. Education inhibits risk taking, or to quote Hamlet for the umpteenth time “Thus conscience does make cowards of us all” and backing a company that’s obviously badly run is tough for me, even when it becomes patently obvious that due to outside factors it’s going to give you upside leverage.

However…and this is important, I really don’t feel like working on this weakness of mine! Unlike points 1) and 2) above, even after recognizing this inhibition to greater stock market profits I actively prefer not to do much about it. For one thing, if I use my strengths as an investor there are still plenty of other vehicles to choose from that will provide me with a market win (e.g. identifying (redated)). For another, there really is more to life than simply making money for me, the Paul van Eeden “Better Sleep Principle” has a corollary here and I just cannot feel relaxed about my sponsorship of mediocrity just because I can ride their backs for a few shekels, I much prefer to back people who do the right things in the right way, with the ideal that eventually the way in which business gets done may improve somewhat. All flowery and pie in the sky stuff, perhaps, but I sleep better that way. Life isn’t all about money.

Bottom line: The idea is that with those three in mind you get a better peek into my mindset and reasoning behind the trades published here in The IKN Weekly. Another bow in the quiver when deciding how to use the information provides for your own circumstances.