Vol II, No. 11

December 2014   

 

 

A monthly commentary about the role of behavior (and misbehavior) in investing

 

 

The Misbehaving Investor
     

Investing decisions start with facts and then move to interpretation - what actions to take as a result of the facts.  The behavioral tendencies that many of us share can impede rationality and successful investing...if they are not addressed.

 

Happy Holidays!

 

John Feb 5  

John Heldman, CFA

President
jheldman@triadim.com


Dave Hutchison, CFA
Managing Director
dhutchison@triadim.com
About Us

Triad Investment Management manages equity and balanced portfolios with a focus on Research, Behavior and Ethics.  We invest in companies with a business-buyer's perspective.  Founded in 2008, Triad is a 100% employee-owned SEC registered investment adviser.  Learn more at www.triadim.com

 

Triad has $136 million of assets under management as of September 30, 2014.  The Concentrated All-Cap Equity composite return, annualized and net of fees since inception, is 10.9% vs. 8.0%  for the S&P 500 Index  (April 30, 2008 to September 30, 2014). 


Please read the above performance in conjunction with our Concentrated All-Cap Equity composite presentation. Past performance does not guarantee future results.


 
 
Triad Small 1-24

Dogged Determination? Or Stubborn Stupidity? 

 

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.  


-John Heldman, CFA
Past performance does not guarantee future results.
Results are presented net of fees and include the reinvestment of all income.

     

2014 Triad Investment Management, LLC