Successful Investing

“How not to be your own worst enemy”

Influence bias

Introduction1. We want certainty

2. We want to know what we will get

So:

3. We look for winners

4. We listen to experts

5. We hear what we want to hear

Certainty• You are ill, you go to two GPs

• First doctor says “I know what this is”

• Second doctor says “Not sure what this is, but have these tablets”

Which one do you trust?

Certainty?• 90% of doctors think they diagnose

correctly first time

• In reality, only 20% get it right first time

Now which one do you trust?

Certainty?• Consensus forecasts of

economists have failed to predict any of the last four recessions

• 94% of analysts predications for 2 years earnings projections are wrong, over 12 months 45% are wrong

Which one do you trust?

Harmful investor behaviour

Investment over 20 years

Return

S&P 500 Equity index 9.14% p.a.

Individual investors 3.83% p.a.

Data Source: Investment Company Institute, Morningstar Associates and DALBAR. 20-year Period Ended December 31, 2010

Harmful investor behaviour

• We usually think we are above average and less likely to make mental errors

• The annual Dalbal studies highlights that we are prone to buy & sell at the wrong time

Reality

“We are our own worst enemies” – Benjamin Graham

The brain• Our brains have been refined by the

process of evolution

• Evolution occurs at a glacial pace

• Designed for the environment we faced 150,000 years ago

• They are potentially poorly suited to the information age we live in today

X & Y Brain

• X Brain – the older animal brain

• Y Brain – the new conscious brain

X & Y Brain• X Brian - the dominant part – i.e. the default

emotional brain

o Everything goes there first o Processes loads of information – quick and dirty ‘satisfying’ systemo Confirms information is correct because it wants it to be, i.e. emotions rule

the day

• Y Brain

o Conscious brain – but 99% of people give it backo Logical part – slow, deductive approach to problem solvingo Evidence and logic are needed to make it believe something is true

X & Y Brain

• X Brain can shut down Y Brain in times of high stress, for example if a physical threat is strong pure X

• Reality both systems are needed – X only would spend all day in bed considering the options

• Summary – X reacts first (i.e. emotion) and Y acts as a checker and sifter (i.e. logic)

X & Y Brain - summary• It takes five minutes for 5 machines to make 5

pies – how long does it take 100 machines to make 100 pies?

• Lily pads on a lake – doubles ever day and full after 48 days, how many days to be half full?

• Summary – X reacts first and Y acts as a checker and sifter

And finally• Have tendency to display traits that prevent us

from doing what we know we should do:

o Historically little volume transacts @ the bottom of the market, or for a time on the way back

o Unless one has pre-planned and pre-committed, opportunities will be missed due to dear induced paralysis

• Warren Buffett “be greedy when others are fearful and fearful when others are greedy”

Influence bias - summary

• Our brain craves certainty, & seeks confirmative information quickly

• Often emotion overrules logic, i.e. confirmative information doesn’t mean we are right

• Warren Buffett said “Investing is simple but not easy” - we can learn to make better investment decisions

Let’s enter the journey together…..