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Successful investing - destructive behaviours


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Continuing our series on how not to be your own worst enemy. This presentation looks at destructive behaviours when investing.

Published in: Economy & Finance, Business
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Successful investing - destructive behaviours

  1. 1. Successful Investing “How not to be your own worst enemy”
  2. 2. Destructive behaviour
  3. 3. Introduction 1. We don’t know how we will behave in the future 2. Emotional strains can cause destructive behaviour, known as empathy gap
  4. 4. Introduction To avoid the empathy gap we need to : 1. Have imposed deadlines 2. Carry out research when we are in a cold and rational state 3. Pre-commit to follow analysis and prepared action steps
  5. 5. “The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.” Sir John Templeton Let’s see how we can avoid destructive behaviour by having a game plan…..
  6. 6. Have a game plan and stick to it……. • Toss a coin, if you win you get £2.50, if not you loss £1 • You have twenty goes, and are given £20 at the start • Experiment shows over time, people bet less often, and their decision making gets worse • It’s not logical but fear creeps in
  7. 7. Have a game plan and stick to it……. • Stock market falls, do you buy the bargains • Evidence suggests fear causes people to ignore bargains because they have suffered a loss • The longer they remain in this cycle the worse their decision- making appears to become
  8. 8. Have a game plan and stick to it……. • Consider X Brain i.e. if we rely on emotions, we will fail because we rely on our abilities rather than relying on Y Brain which ways up logic and evidence • So rather than suffer from terminal paralysis or fear, have a game plan for reinvestment and stick to it
  9. 9. Draw up a game plan • Find stocks that you like, research, are they overpriced / under-priced etc. • Draw up a schedule of pre-commitments, or a wish list of securities representing companies that are well run but priced too high • Make sure you have cash, and keep an eye on the stocks so if the market drags the price down you can buy in • Remove destructive behaviour and stick to the game plan
  10. 10. Destructive behaviour – summary • Seth Klarman wrote: o Historically little volume transacts at the bottom or on the way back up o Competition from other buyers will be much greater when the markets settle down and the economy begins to recover o Moreover the price recovery from a bottom can be very swift o Therefore an investor should should put money to work amidst the throes of a bear market, appreciating that things will get worse before they get get better • This is contrarian and against X Brain thinking but having a plan works, having a schedule of pre-commitment removes destructive behaviour bias i.e. simple steps mean that we can make a difference in our starting point