All of a sudden, plenty of time has passed since my last post (which was my first ever stock write-up!) During this time, I’ve spent a lot of time working my day job, reading many books, hanging with friends & family, and thinking about that post.
The more I thought about it, the more I realized a glaring issue that I needed to correct. As part of my write-up, I posted a disclaimer reading: “Disclaimer: I currently own Naspers (NPSNY) as a 0.21% personal stock portfolio position. As of the time of your reading, I may have increased or decreased this position.”
My disclaimer was weak because this doesn’t get into the essential part of investing, psychology. My psychology is very different from your psychology, and I have all sorts of weird quirks that are very particular to my upbringing/current life situation/personal experiences. This article will get into some of the investing biases that I view I have more than other investors.
I imagine this will be a bit of a difficult article to write, as there is a lot about human nature that makes it challenging to admit faults. As a result, my description of my biases will likely be understated, and these faults may be even more significant than I describe.
I Am Slow to Change My Mind
I like to think of myself as being a very patient investor. I enjoy diving into years of company financial statements, annual reports, competitive dynamics, and qualitative information about customer behaviors. Business trends usually take long periods of time to evolve, and the sources that I collect data from often reflect that slow trend.
When I buy stocks, I often do so slowly by investing portions of my paycheck into the businesses I’d like to own. For example, there is a company in my portfolio that I have continuously been buying since March 2018. I often choose not to reallocate existing stock positions, and when I do so, I do it after careful deliberation.
Because of my slow and continuous investing method, I will be too slow to react to quick changes in business prospects.
A recent example of this is during Covid-19, the airline industry had an overnight huge change in prospects. I owned a somewhat large portfolio allocation to airlines at the time (I now own a smaller allocation), and I did not grasp how Covid would significantly negatively impact the industry. I refused to believe that decades of business travel trends could be changed so quickly and dramatically.
Rationalizing away, I would cling to my years of financial reports showing gradually improving profitability. Read and re-read reports on the market shares of the airline companies showing a gradual industry consolidation. Finally, I would think of my own experiences with business travel and how meaningful the in-person interactions were for creating connections.
In the end, it changed very quickly in a way that I didn’t expect because I am slow. I still own an airline too, which further illustrates just how slow I can be. This example leads us nicely to my next personal bias.
I Often Am Overly Optimistic in Assessing Probabilities
The example on airlines I shared above also showcased how I can be overly optimistic in assessing failure probabilities. Human history is primarily a story of gradual improvements coupled with occasional severely negative shocks. As a student of history, I believe that all of my reading on the incremental progress of life has made me skeptical of the long-term impacts of negative shocks.
This optimism also stems from my personal financial history. I have been fortunate to have two loving parents who have always provided for me. During the financial crisis of 08, my parents’ employment and daily life were unaffected. I don’t even remember them being particularly stressed. Thus at the time, when I was 12, I didn’t realize there was a panic going on. I just continued with my life worrying about whatever it is 12-year-olds worry about (it was probably about girls).
Similarly, for the 2020 recession, my career prospects were unimpacted. I had to go through a significant social transformation by not going into the office, but other than that, I’ve had little impact on my life. In fact, most effects were positive because I bought stocks at dirt-cheap prices and was given stimulus checks.
The problem with instinctively downplaying negatives is that when I weigh the probabilities of events, I will have a tendency to overweight the likelihood of positive outcomes.
I tend to buy stocks in what is currently unloved and find diamonds amongst what investors hate. In my view, these stocks often have excess negativity baked into their stock prices. However, I am starting to realize I may also have extra positivity baked into my expectations of these businesses’ values.
In my future stock write-ups, I will accidentally downplay risks that other people overestimate. I hope to have bought these businesses at low enough prices to counteract this tendency, but there is no guarantee that I will always do this.
Another way that I will look to counteract my tendency is to buy stocks with very low amounts of debt relative to their ability to take on debt. Well, let me move on to the next bias before I continue to try to rationalize away my faults.
I Have Excess Confidence in My Future Prospects and Investing Knowledge
When you read my stock write-ups, you should also know that my investing style often has levels of portfolio concentration that people may view as extremely risky. As of the time of writing, one of my stocks makes up about 50% of my stock portfolio.
There is a reason that I do this. As a 25-year-old, I view that many of my years of investing are ahead of me. I also believe that my years of highest job earnings are also ahead of me. In my view, this affords me the ability to have very concentrated current portfolios. What I must warn you of is there is a possibility that this view stems from complete arrogance.
I also spend enormous amounts of time studying the companies that I own or think about buying. This is one of the benefits that come from a concentrated portfolio; it focuses my research. When I spend so much time reading and thinking about one particular company, I will feel overly confident about the situation. I will believe that other investors running away from the stock haven’t done the amount of research that I have, but in reality, many have done more research than me.
I’ve spent hours and hours reading about companies, reading about general investing principles, and learning from the best investors in the world. All of these factors combine to make me overconfident in my conclusions. Hopefully, me writing this will give me some humility. It’s likely, though, that it won’t.
You’ve Now Heard Some of My Faults
Writing this blog was very interesting. Now that I’m summing it up, I have to admit something to you. I likely have way more behavioral investing biases. I’ve now only just told you the ones I am aware of.
I’ll now link to this article in my stock write-ups so that you folks know the kind of person you’re dealing with when you read my views. I will also try to update this log of biases as I become more aware of my investing psychology’s unique circumstances.