Actor and musician Oscar Levant-you remember him, right? - once said "There is a fine line between genius and insanity.  I have erased that line."  Well, the bad news is I'm not sure what he meant by that.  The good news is we're not going to discuss genius or insanity, because I'm neither.

No, what I'd like to discuss, as the title implies, is the challenge all investors must confront at times.  When an investment is not going your way, you're either losing money or not making much, and doubts begin to invade your mind.  Did I make a mistake?  Am I missing something that other investors can clearly see?  Am I just too early?  Or it could be the opposite, you have a terrific investment that has been a real winner, and you might be reluctant to reduce or sell the stock.  You're sure there is more good news to come.  Yet the stock starts to decline and you reason it's just temporary.  Maybe it is, but it might be the start of more bad news.

Where is the fine line between being determined and disciplined on one hand, and remaining stubborn and refusing to face new facts on the other hand?  Hint: it ain't easy to always know if you're right. 

Thoughtful decisions benefit from honest self-analysis and complete objectivity.  Heightened self-awareness of our actions (and inactions) is necessary to guard against irrational thoughts and behaviors.   Ultimately, in our view, investment success must come from having sufficient knowledge to make a rational decision.  Knowledge is cumulative, and the more the better.  But knowledge isn't enough on its own. 

Knowledge must be combined with rational thought.  The challenge is that our brains are most susceptible to going haywire during stressful market environments, which is exactly when clear and rational thought is most needed.  We're all susceptible to being fooled by ourselves.  We become anchored to certain beliefs and our minds can subconsciously trick us into repeating the same mistakes. 

We must recognize and resist the behavioral biases that can turn a good decision into a pile of neural mushiness.   Acknowledging these emotional influences is the first step in dealing with them. 

They include the tendency to reach conclusions before analyzing data, latching onto recent data mostly because it's newer (not necessarily more significant), and herding - following the crowd instead of thinking for ourselves.

At times, dogged determination is a necessary requirement to get through difficult market conditions.  Just make sure the stuff between your ears doesn't fall prey to stubborn stupidity.