1. Understanding the Biases.
Pogo, the folk philosopher created by the cartoonist Walt Kelly, provided an insight that is particularly relevant for investors, "We have met the enemy - and it's us". So, understand your biases (the enemy within) as this is an important step in avoiding them.
2. Focus on the Big Picture.
Develop an investment policy and put it down on paper. Doing so will make you react less impulsively to the gyrations of the market.
3. Follow a Set of Quantitative Investment Criteria.
It is helpful to use a set of quantitative criteria such as
- the price-earnings ratio being not more than 15,
- the price to book ratio not more than 5,
- the growth rate of earnings being at least 12%, and so on.
4. Diversify
If you own a fairly diversified portfolio of say 12 to 15 stocks from different industries, you are less prone to do something drastically when you incur losses in one or two stocks because these losses are likely to be offset by gains elsewhere.
5. Control Your Investment Environment
If you are on a diet, you should not have tempting sweets and savouries on your dining table. Likewise, if you want to discipline your investment activity, you should regulate or control your investment environment. Here are some ways of doing so:
- Check your stocks only once every month.
- Trade only once every month and preferably on the same day of the month.
- Review your portfolio once or twice a year.
6. Strive to Earn Market Returns
Seek to earn returns in line with what the market offers. If you strive to outperform the market, you are likely to succumb to psychological biases.
7. Review Your Biases Periodically
Once in a year, review your psychological biases. This will throw up pointers to contain such biases in the future.
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A detailed discussion on the above topic, click here:
https://myinvestingnotes.blogspot.com/2025/11/tuesday-2-september-2008-strategies-for.html
Summary
In essence, the provided text argues that the greatest threat to investment success is not the market itself, but the investor's own psychological hardwiring. The prescribed strategies form a coherent defence system against these internal biases:
Acknowledge the Problem: Begin by understanding that you are prone to predictable cognitive errors like overconfidence and loss aversion.
Create a Constitution: Develop a written Investment Policy Statement to define your long-term goals and strategy, insulating you from short-term market "gyrations."
Systematise Decisions: Use quantitative criteria to remove emotion from stock selection and create a repeatable, disciplined process.
Manage Risk and Emotion: Diversify your portfolio to ensure that no single failure can trigger a panicked, "drastic" reaction.
Design for Success: Control your environment by reducing the frequency of checking and trading, thus minimising temptation and noise.
Manage Expectations: Consider aiming for market returns via indexing as a way to completely avoid the behavioural pitfalls of trying to beat the market.
Commit to Learning: Conduct an annual review of your decisions to identify and learn from your behavioural mistakes, creating a feedback loop for continuous improvement.
Ultimately, this framework is not about finding a secret formula for picking winning stocks; it's about building robust psychological and procedural habits that prevent you from making costly behavioural mistakes, thereby allowing the power of long-term, disciplined investing to work in your favour.
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