One of the biggest mistakes an investor can make is ignoring or denying his or her biases.

The thought process through which most of us arrive at our view of the future is highly reflective of our biases. Given the unusually wide chasm between the optimistic and pessimistic cases at this time – and the impossibility of choosing between them based on facts and historical precedents (since there are none) – think about the role of bias.




Ignoring or denying your biases is a big mistake

One of the biggest mistakes an investor can make is ignoring or denying his or her biases. If there
are influences that make our processes less than objective, we should face up to this fact in order to
avoid being held captive by them.



Our biases may be insidious, but they are highly influential. 

Examples of "confirmation bias"

When I read articles about how difficult it will be to provide adequate testing for Covid-19 or to get support to small businesses, I’m pleased to see my wary views reinforced, and I find it easy to incorporate those things into my thinking.

But when I hear about the benefits of reopening the economy or the possibility of herd immunity, I find it just as easy to come up with counter-arguments that leave my concerns undented.


This is a clear example of “confirmation bias” at work:

• Once we have formed a view, we embrace information that confirms that view while ignoring, or rejecting, information that casts doubt on it. 
• Confirmation bias suggests that we don’t perceive circumstances objectively. 
• We pick out those bits of data that make us feel good because they confirm our prejudices. 
• Thus, we may become prisoners of our assumptions. (Shahram Heshmat, Psychology Today, April 23, 2015)

As Paul Simon wrote 50 years ago for the song The Boxer, “. . . a man hears what he wants to hear and disregards the rest.”



More examples of confirmation bias

• While I didn’t know the name for it, I’ve long been aware of my bias. In a recent memo, I told the story from 50 years ago, when I was Citibank’s office equipment analyst, of being asked who the best sell-side analyst on Xerox was. My answer was simple: “The one who agrees with me most is so-and-so.” Most people are unlikely to think highly of anyone whose views they oppose. So when we think about which economists we quote, which investors we respect, and where we get our information, it’s likely that their views will parallel ours.

• Of course, taken to an extreme, this has resulted in the unfortunate, polarized state in which we find the U.S. today. News organizations realized decades ago that people would rather consume stories that confirm their views than those that challenge them (or are dully neutral). Few people follow media outlets that reflect a diversity of opinion. Most people stick to one newspaper, cable news channel or political website. And few of those fairly present both sides of the story. Thus most people hear a version of the news that is totally unlike the one heard by those on the other side of the debate. When all the facts and opinions you hear confirm your own beliefs, mental life is very relaxed but not very enriching.

What’s the ideal? 

A calm, open mind and an objective process. 

Wouldn’t we all be better off if those things were universal?

Reference:

In investing, uncertainty is a given – how we deal with it will be critical. Read Howard Marks’s latest memo, in which he discusses the value of understanding the limitations of our foresight and “investing scared.”

https://www.oaktreecapital.com/docs/default-source/memos/uncertainty.pdf

The Hidden Traps in Decision Making

Making decisions is one of the most important things we do in our daily living.  It is also the toughest and riskiest in some situations.  Bad decisions can damage your career, business and finances, sometimes irreparably.



So where do bad decisions come from? 

In many cases, they can be traced back to the way the decisions were made:

• the alternatives were not clearly defined,
• the right information was not collected,
• the costs and benefits were not accurately weighed.

But sometimes the fault lies not in the decision-making process but rather in the mind of the decision maker.  The way the human brain works can sabotage our decisions.

Psychological traps

There are a number of well-documented psychological traps that are particularly likely to undermine decision making.  These include:

• heuristics#, 
• biases and 
• other irrational anomalies in our thinking.  

Your best defense is AWARENESS

There are specific ways you can guard against them.  However, the best defense is always awareness.  

By familiarizing yourself with these traps and the diverse forms they take, you will be better able to ensure that the decisions you make are sound and that the recommendations proposed by others (your subordinates or associates) are reliable.

Additional notes:

#heuristics:  

These are unconscious routines we use to cope with the complexity inherent in most decisions.  These routines serve us well in most situations.  These simple mental shortcuts help us to make the continuous stream of judgments required to navigate the world.  But, not all heuristics are foolproof.  The resulting decisions often pose few dangers for most of us, and can be safely ignore.  At times, the decisions arising from these heuristics can be catastrophic.  What make all these traps so dangerous is their invisibility.  Because they are hardwired into our thinking process, we fail to recognize them - even as we fall right into them.

Psychological Biases

Loss Aversion

Behavioural finance asserts that investors exhibit loss aversion, that is, they dislike losses more than they like comparable gains.

This results in a strong preference for avoiding losses as opposed to achieving gains.

Advocates of this bias argue that loss aversion is more important to investors than risk aversion,, which is why the "overreaction" anomaly is observed.

While loss aversion can explain the overreaction anomaly, studies have shown that under reactions are just as common as overreactions, which counters the assertions of this bias.



Herding

Herding behaviour is a behavioural bias that explains both under reactions and overreactions in financial markets.

Herding occurs when investors ignore their own analysis, and instead make investment decisions in line with the direction of the market.



Overconfidence

Overconfdence bias asserts investors have an inflated view of their ability to process new information appropriately.

Overconfident investors are inaccurate when it comes to valuing securities given new information, and therefore stocks will be mispriced if there is an adequate number of such investors in the market.

Evidence has suggested that overconfidence has led to mispricing in most major markets around the world, but the bias has been observed predominantly in higher-growth companies, whose prices are slow to factor in any new information.

Another aspect of this bias is that overconfident investors tend to maintain portfolios that are less-than-optimally diversified because they tend to overestimate their stock-picking abilities.




Information Cascades

An information cascade refers to the transfer of information from market participants who are the first to take investment action upon the release of new information, and whose decisions influence the decisions of others.

Studies have shown that information cascades tend to be greater for stocks when reliable and relevant information about the underlying company is not easily available.




Representativeness

Investors assess probabilities of future outcomes based on how similar they are to the current state.



Mental Accounting

Investors tend to keep track of gains and losses from different investments in separate mental accounts.



Conservatism

Investors are slow to react to changes and continue to maintain their initial views.



Narrow framing

Investors focus on issues in isolation

Behavioural Finance

Behavioural finance looks at investor behaviour to explain 

• why individuals make the decisions that they do, 
• whether these decisions are rational or irrational.

It is based on the premise that individuals, due to the presence of behavioural biases:

• do not always make "efficient" investment decisions, or 
• do they always act "rationally" 

These behavioural biases include:

• Loss Aversion
• Herding
• Overconfidence
• Information Cascades
• Representativeness
• Mental Accounting
• Conservatism
• Narrow Framing

Whether investor behaviour can explain market anomalies is a subject open to debate.

• If investors must be rational for the market to be efficient, then markets cannot be efficient.
• If markets are defined as being efficient, investors cannot earn superior risk-adjusted profits consistently. 

Heuristics

Heuristics are simple rules of thumb, developed by humans, which enable them to efficiently make decisions.

Heuristics are essentials; without them it would be impossible to make the decisions required to get through a normal day.

They allow people to cope with information and computation overload and to deal with risk, uncertainty  and ignorance.

Unfortunately, these heuristics can sometimes result in tendencies to do certain things that are dysfunctional.

Everyone must be careful not to fall prey to certain (often dysfunctional) tendencies.

In the context of human activities that were not a part of most of our evolutionary past as a species, such as investing, heuristics can produce one mistake after another.

"Individuals tend to extrapolate heuristics from situations where they make sense to those where they do not."

Heuristics conserve scarce mental and physical resources, but the same process, which is sometimes beneficial, can lead people to harmful systemic errors.

An approach to risk:  Probability of loss X the amount of possible loss  versus Probability of gain X the amount of possible gain.

If the amount of loss is massive even if the probability was small, rationality should overcome psychological denial, optimism, and other negative decision-making tendencies.

The reality is that we all tell ourselves false stories to avoid the truth.

Even if you spend a lot of time studying behavioural economics, you can only improve your skills on the margin.  You will always make mistakes.

If you understand dysfunctions that are caused by behavioural economics phenomena and the other person does not, then you have a potential edge.

The best Graham value investors spend a lot of time thinking about possible sources of dysfunctional decision-making and emotional errors.

Other people's errors create opportunities for the Graham value investor.

"There is a lot of behavioural finance confirming Ben Graham's original judgment." (Professor Bruce Greenwald of Columbia Business School.)

You will need to deal with heuristics like mental accounting, sunk cost, ambiguity, regret and framing, just to name a few in your investing journey.

"The 4 Diseases" of Investing - Evenitis (holding to losers), Taking profits (selling winners), Over-trading and FOMO

Teaminvest Co-founder Professor John Price, recently recorded an informative 4.5 minute video about the behavioural biases that often block rational decision-making about investments.

It’s titled “The 4 Diseases”. In the video he explains the four common behavioural biases and fuzzy thinking affecting the way we assess investments. He calls them:

• Get even-itus
• Consolidatus-profitus
• Trade-a-filia
• FOMO

Watch the video and see if you suffer from any of them? - Self awareness will improve your investment decision-making!

Click on John's pic

https://lr220.infusionsoft.com/app/hostedEmail/21336/90e5395442506435?inf_contact_key=bfe1f769afcc1ca46d38151bc79936d7f17975b54721e97cab312e8b684f90d3

Regards

Mark Moreland Co-Founder NOTES: Stock selection - Read the annual reports - Read all the analysts reports - Visit the stores or use their products and services If you find that at the end of the day, the performance of the portfolio is not that good, or mediocre at best, in many cases there are various reasons. They often have not taken into account behavioural biases, the sort of fuzzy thinking that is automatically in their mind that blocks out their rational decision. These are the 4 behavioural biases, which we refer to them as:

• Get even-itus
• Consolidatus-profitus
• Trade-a-filia
• FOMO

Get even-itus

The disease of hanging onto a stock when the price has gone down until you can get even.  "Don't worry dear, it is going to come up back again."   The problem is, if the stock has gone down, the chances are it is going to continue to go down and best it is going to be a mediocre investment.  It is much better to face the fact that you have a loser, you lost money and to move on.

Consolidatus-profitus

This is the opposite to get even-itus.  This is the disease of always taking a profit when the price goes up.  It looks great and you can tell your friend at the dinner party that your stock went up 20%, 40% or 50% and you sold it.   The problem is what you are going to do with that money.  Studies have shown, on average, people who sell just to take a profit end up putting their money back into the market in a stock that underperforms the one they got out of.  #

Get even-itus and Consolidatus-profitus are two sides of the one coin; generally hang on to losers and sell winners.  The opposite would be better, that is, sell your losers and hold on to your winners.  They water the weeds and cut the flowers.  It would be better they  water the flowers and cut the weeds.

Trade-a-filia

This is the disease of just loving to trade. Most people who would never dream of going to casino betting on roulette or any of the casino games or machines,yet when they are on their internet and looking at their stocks, they trade far too often.  It is so simple to trade on the internet and they get drawn into it.  But studies have shown that on average, the more a person trades they worse they do. I am not referring to their transaction costs but actually their performance diminishes.  Instead of looking for great companies that are going to make you money year after year, they think they can get a short term profit.   In the short term, the share prices are much more random than most people believe.  So this is a disease of trading too often.  In this regard, women are better investors than men, because overall, women trade less than men.  

FOMO

This is the 4th disease, the FEAR OF MISSING OUT.  You read about a particular stock and its price is going up and you think, if I don't get in now, I am going to miss out, instead of taking your time and evaluating the stock properly.   

These 4 diseases really work together and at best give you a mediocre performance that is far far below you optimal performance.  

You should work to eliminate these 4 investing biases or diseases, consciously.  Use tight filters to filter out the best companies to concentrate in.  

Be alert that you are not slipping into these investment biases.  Eliminate these investing biases and your performance will be much better. 

# Reinvestment risk.

'Being human" costs the average investor around 3 - 4% in return every year.

The cost of being human

When it comes to investing, human nature doesn’t help. Our innate need for emotional comfort is estimated to cost the average investor around 3–4% in returns every year.* And for many, the figure can be much greater.

This shortfall in returns is partly caused by what is known as the Behaviour Gap. It explains the difference between long-term financial returns (if we were only to stick to sensible and simple rules for investing) and actual returns (which are determined by all our short-term decision-making, often based on our emotional needs).

A good example is how our investment strategy often goes off course in turbulent times. So despite the obvious costs, we can often end up buying high and selling low.


*Source: Barclays Wealth & Investment Management, White Paper - March 2013, ‘Overcoming the Cost of Being Human’.

http://www.investmentphilosophy.com/fpa/

6 Reasons You're A Bad Investor

BY  James Early
Published in Investing on 5 January 2012

These mental traps may be killing your portfolio.

Made a New Year's resolution? You won't keep it.

Or at least there's a 78% chance you won't, according to a study reported in The Guardian a few years back.

But you knew the odds were against you, as years of failure have taught most of us already. Yet we continue to make resolutions... and continue to fail by allowing our brains to work against us. Fortunately, for you, people fail just as often -- if not more so -- with their investing.

This gives you a great opportunity to help improve your profits in the market: by noticing and controlling the psychological failings in your own investing. Indeed, these mental traps may be killing your portfolio!

1. Framing errors

"Which do you enjoy more: peas or carrots?" assumes that you enjoy either peas or carrots. You probably do, but together, our mental questions and perspectives often limit our thinking.

Erroneously comparing shares of different risks -- such as comparing the upside of a penny share to a stalwart such as National Grid (LSE: NG) -- and evaluating shares on short-term criteria (if you're a long-term investor) are classic mistakes. Fight it by taking the broadest, most rational view of your agenda, and question all your assumptions.

2. Confirmation bias

Isn't it splendid to see a positive article on a share we already own? It makes us feel quite smart. We all revel in support for our own ideas, and prefer to conveniently forget about conflicting evidence.

Indeed, before the financial crash, many of us remained tethered to old views about bank shares, despite the changing facts. Even HSBC (LSE: HSBA) -- one of the better banks -- saw its shares more than halve. The remedy is to forcibly seek out contrary views.

3. Consistency bias

You've convinced your wife that a share is a good buy. You've told your neighbours, and your workmates know as well. If you're like me, you've written about it on the internet, too. And then you find a bit of incriminating evidence that you missed. What do you do?

Rationally, we all know what's best -- but if we're honest, we have to acknowledge the strong pull to appear consistent. In life, how many times do thought leaders in a field actually admit to a mistaken idea? As with oppressive dictatorships, it's usually only by the previous generation dying off that change really happens.

Consistency bias is incredibly powerful and, incidentally, I'm sticking to what I've said on the topic, no matter what.

4. Recency bias

Your football team has lost two consecutive matches. Heads need to roll. Because recent events generate stronger, more 'real' feelings to us, we weight them more in our mind, even if they don't deserve it.

Momentum investors thrive on recency bias, but fundamental sorts -- and if you're reading this, odds are, you're probably a fundamental investor -- would do well to turn the volume down on the latest news. The media doesn't make it easy, though.

5. Herd instinct

We're drawn to the 'safety' in numbers, even if that safety doesn't exist. Ditto for City analysts, who often find it safest to predict roughly the same thing everyone else is predicting, with a few tweaks made for the sake of appearance. We at The Motley Fool aim to help you here, as we tend to be a bit quirky for City work in the first place.

6. Survivorship bias

For every long-term corporate winner -- be it a utility such as Vodafone (LSE: VOD) or something more industrial such as BHP Billiton (LSE: BLT) -- often hundreds of losers have fought and lost the battle for dominance.

We don't hear much about the losers, but focusing on the winners gives us a false picture of the competitive fire through which they, and their many fallen peers, almost certainly passed en route.

Cognitive biases

These are just a sample of the psychological traps we can fall into, and I'd invite you to Google 'cognitive biases' for many more. You'll notice a common theme: they're mental shortcuts -- heuristics, as we say -- that actually serve the caveman rather well. Less so the investing man.

And probably the forgetful New Year's man as well.

Trying to sidestep these mental biases is less sexy than chasing the next big penny share. It's a methodical, slow and boring process, which rarely shows an immediate benefit. Yet in my view, slow and steady is what successful fundamental investing tends to look like. 

Attention! The Fool's latest wealth report -- Ten Steps To Making A Million -- is still free for all private investors. Download your copy, with no further obligation!

http://www.fool.co.uk/news/investing/2012/01/05/6-reasons-youre-a-bad-investor.aspx?source=ufwflwlnk0000001

Knowing about the psychological biases is not enough. You must also have a strategy for overcoming them.

Battling Your Biases

Remember the day-trader cartoon in Chapter 1? The roller coaster called "The Day Trader" represents the modern investment environment. The roller coaster has dramatic highs and lows. As a modern-day investor, you can experience strong emotional highs and lows. This emotional roller coaster has a tendency to enhance your natural psychological biases. Ultimately, this can lead to bad investment decisions.

The previous chapter began the discussion of how to overcome your psychological biases. It introduced two strategies of exerting self-control: rules of thumb and envi­ronment control. This chapter proposes strategies for controlling your environment and gives you specific rules of thumb that focus you on investing for long-term wealth and on avoiding short-term pitfalls caused by decisions based on emotions.

The first strategy was proposed in Chapter 1: Understand the psychological biases. We have discussed many biases in this book. You may not remember each bias and how it affects you (due to cognitive dissonance and other memory biases—see Chapter 10), so reviewing them here should be beneficial. In fact, to help you make wise investments long after reading this book, you should re-familiarize yourself with these biases next month, next year, and every year.

STRATEGY 1: UNDERSTAND YOUR PSYCHOLOGICAL BIASES

In this book, there are three categories of psychological biases: not thinking clearly, letting emotions rule, and functioning of the brain. Let's review the biases in each category.

(a)  Not Thinking Clearly

Your past experiences can lead to specific behaviors that harm your wealth. For example, you are prone to attribute past investment success to your skill at investing. This leads to the psychological bias of overconfidence. Overconfidence causes you to trade too much and to take too much risk. As a consequence, you pay too much in commissions, pay too much in taxes, and are susceptible to big losses.

The attachment bias causes you to become emotionally attached to a security. You are emotionally attached to your parents, siblings, children, and close friends. This attachment causes you to focus on their good traits and deeds. You also tend to discount or ignore their bad traits and deeds. When you become emotionally attached to a stock, you also fail to recognize bad news about the company.

When taking an action is in your best interest, the endowment bias and status quo bias cause you to do nothing. When securities are given to you, you tend to keep them instead of changing them to an investment that meets your needs. You also procrastinate on making important decisions, like contributing to your 401(k) plan.

In the future, you should review these psychological biases.

(b)  Letting Emotions Rule

Emotions get in the way of making good investment decisions. For example, your desire to feel good about yourself—seeking pride— causes you to sell your winners too soon. Trying to avoid regret causes you to hold your losers too long. The consequences are that you sell the stocks that perform well and keep the stocks that perform poorly. This hurts your return and causes you to pay higher taxes.

When you are on a winning streak, you may feel like you are playing with the house's money. The feeling of betting with someone else's money causes you to take too much risk. On the other hand, losing causes emotional pain. The feeling of being snake bit causes you to want to avoid this emotional pain in the future. To do this, you avoid taking risks entirely by not owning any stocks. However, a diversified portfolio of stocks should be a part of everyone's total investment portfolio. Experiencing a loss also causes you to want to get even. Unfortunately, this desire to get even clouds your judgment and induces you to take risks you would not ordinarily take.

And finally, your need for social validation causes you to bring your investing interests into your social life. You like to talk about investing. You like to listen to others talk about investing. Over time, you begin to misinterpret other people's opinions as investment fact. On an individual level, this leads to investment decisions based on rumor and emotions. On a societal level, this leads to price bubbles in our stock market.

(c) Functioning of the Brain

The manner in which the human brain functions can cause you to think in ways that induce problems. For example, people use mental accounting to compartmentalize individual investments and categorize costs and benefits. While mental accounting can help you exert self-control to not spend money you are saving, it also keeps you from properly diversifying. The consequence is that you assume more risk than necessary to achieve your desired return.

To avoid regret about previous decisions that did not turn out well, the brain filters the information you receive. This process, called cognitive dissonance, adjusts your memory about the information and changes how you recall your previous decision. Obviously, this will reduce your ability to properly evaluate and monitor your investment choices.

The brain uses shortcuts to reduce the complexity of analyzing information. These shortcuts allow the brain to generate an estimate of the answer before fully digesting all the available information. For example, the brain makes the assumption that things that share similar qualities are quite alike. Representativeness is judgment based on stereotypes. Furthermore, people prefer things that have some familiarity to them. However, these shortcuts also make it hard for you to correctly analyze new information, possibly leading to inaccurate conclusions. Consequently, you put too much faith in stocks of companies that are familiar to you or represent qualities you desire.

This review of the psychological biases should help you with the first strategy of understanding your psychological biases. However, as Figure 15.1 suggests, knowing about the biases is not enough. You must also have a strategy for overcoming them.

"Y

THE EFFECTS OF YOUR PSYCHOLOGICAL BIASES (CONTINUED).
Psychological	Effect on		Table
Bias	Investment Behavior	Consequence	15.1
Get Even	Take too much risk	Susceptible to big
	trying to break even	losses
Social Validation	Feel that it must be	Participate in a price
	good if others are in-	bubble which ulti-
	vesting in the security	mately causes you to buy high and sell low
Mental	Fail to diversify	Not receiving the
Accounting		highest return possible for the level of risk taken
Cognitive	Ignore information that	Reduces your ability to
Dissonance	conflicts with prior	evaluate and monitor
	beliefs and decisions	your investment choices
Representativeness	Think things that seem	Purchase overpriced
	similar must be alike.	stocks
	So a good company must
	be a goodinvestment.
Familiarity	Think companies that	Failure to diversify
	you know seem better	and put too much
	and safer	faith in the company in which you work

STRATEGY 2: KNOW WHY YOU ARE INVESTING

You should be aware of the reasons you are investing. Most investors largely overlook this simple step of the investing process, having only some vague notion of their investment goals: "I want a lot of money so that I can travel abroad when I retire." "I want to make the money to send my kids to college." Sometimes people think of vague goals in a negative form: "I don't want to be poor when I retire." These vague notions do little to give you investment direction. Nor do they help you avoid the psychological biases that inhibit good decision making. It is time to get specific. Instead of a vague notion of wanting to travel after retirement, be specific. Try

A minimum of $75,000 of income per year in retirement would allow me to make two international trips a year. Since I will receive $20,000 a year in Social Security and retirement benefits, I will need $55,000 in investment income. Investment earnings from $800,000 would generate the desired income. I want to retire in 10 years.

Having specific goals gives you many advantages. For example, by keeping your eye on the reason for the investing, you will

■     Focus on the long term and look at the "big picture"

■     Be able to monitor and measure your progress

■     Be able to determine if your behavior matches your goals

For example, consider the employees of Miller Brewing Company who were hoping to retire early (discussed in Chapter 11). They had all their 401(k) money invested in the company stock, and the price of the stock fell nearly 60%. When you lose 60%, it takes a 150% return to recover the losses. It could easily take the Miller employees many years to recover the retirement assets. What are the conse quences for these employees? Early retirement will probably not be an option.

Investing in only one company is very risky. You can earn great returns or suffer great losses. If the Miller employees had simply compared the specific consequences of their strategy to their specific investment goals, they would have identified the problem. In this type of situation, which option do you think is better?

A.  Invest the assets in a diversified portfolio of stocks and bonds
that will allow a comfortable retirement in two years.

B.   Invest the assets in the company stock, which will either earn
a high return and allow a slightly more comfortable
retirement in two years, or suffer losses which will delay
retirement for seven years.

Whereas option A meets the goals, option B gambles five years of work for a chance to exceed the goal and is not much different than placing the money on the flip of a coin.

STRATEGY 3: HAVE QUANTITATIVE INVESTMENT CRITERIA

Having a set of quantitative investment criteria allows you to avoid investing on emotion, rumor, stories, and other psychological biases. It is not the intent of this book to recommend a specific investment strategy like value investing or growth investing. There are hundreds of books that describe how to follow a specific style of investing. Most of these books have quantitative criteria.

Here are some easy-to-follow investment criteria:

■    Positive earnings

■    Maximum P/E ratio of 50

■    Minimum sales growth of 15%

■    A minimum of five years of being traded publicly

If you are a value investor, then a P/E maximum of 20 may be more appropriate. A growth investor may set the P/E maximum at 80 and increase the sales growth minimum to 25%. You can also use criteria like profit margin and PEG ratio, or you can even look at whether the company is a market share leader in sales.

Just as it is important to have specific investing goals, it is important to write down specific investment criteria. Before buying a stock, compare the characteristics of the company to your criteria. If it doesn't meet your criteria, don't invest!

Consider the Klondike Investment Club of Buffalo, Wyoming, discussed in Chapter 7. The club's number one ranking stems in part from its making buy decisions only after an acceptable research report has been completed. Klondike's criteria have protected its members from falling prey to their psychological biases. On the other hand, the California Investors Club's lack of success is due partially to the lack of criteria. Its decision process leads to buy decisions that are ultimately controlled by emotion.

I am not suggesting that qualitative information is unimportant. Information on the quality of a company's management or the types of new products under development can be useful. If a stock meets your quantitative criteria, then you should next examine these quali tative factors.

STRATEGY 4: DIVERSIFY

The old adage in real estate is that there are three important criteria when buying property: location, location, location. The investment adage should be very similar: diversify, diversify, diversify.

It is not likely that you will diversify in a manner suggested by modern portfolio theory and discussed in Chapter 9. However, if you keep some simple diversification rules in mind, you can do well.

■   Diversify by owning many different types of stocks. You can be reasonably well diversified with 15 stocks that are from different industries and of different sizes. One diversified mutual fund would do it too. However, a portfoilio of 50 technology stocks is not a diversified portfolio, nor is one of five technology mutual funds.

■    Own very little of the company you work for. You already have your human capital invested in your employer—that is, your income is dependent on the company. So diversify your whole self by avoiding that company in your investments.

■    Invest in bonds, too. A diversified portfolio should also have some bonds or bond mutual funds in it.

Diversifying in this way helps you to avoid tragic losses that can truly affect your life. Additionally, diversification is a shield against the psychological biases of attachment and familiarity.

http://www.physcomments.org/THE-INVESTMENT-ENVIRONMENT/functioning-of-investment-choices-the-brain2.html

Bullbear Stock Investing Notes