Good morning,
Today’s newsletter will cover the impact of Confirmation Bias and the impact this may have on your investing, without realizing it yourself.
As always, feel free to listen along or read the transcript below:
Just as a side note for the week, this is how the earnings calendar looks for the week ahead:
You may notice that I hold 5 of the companies in the above table; Pfizer, Starbucks, PayPal, Apple and MGM Resorts.
You may also notice that Starbucks, PayPal, Apple and MGM report after market close. US market close for me, is 9PM UK time, and typically the earnings are not released for an hour after that, give or take.
As a result, i will be compiling the earnings reviews of those companies the following morning/day.
Therefore you can expect the following timetable of earnings, if you are a paid subscriber:
Tuesday: PFizer
Wednesday: Starbucks
Thursday: PayPal
Friday: Apple and MGM
Have a great day
IT
Transcript:
Good morning,
So, I state fairly often that investing is as much about mentality as it is about the more quantitative skills like fundamental analysis.
This is true, and always has been.
A weak mentality will cause the investor to miss opportunities and make mistakes.
Confirmation bias is the tendency to search for, interpret, favour, and recall information that confirms or supports one's prior personal beliefs or values. It is an important type of cognitive bias that has a significant effect on the functioning of investment related decision by distorting evidence-based decision-making in a way that favors your own opinion.
We would essentially be blinding yourself to contradictory evidence.
This could be as simple as only reading the bullish sentiment for your position in Starbucks and ignoring all the potential bearish sentiment.
So here is how this can cause issues.
Let’s say I explain some new information related to your stock of choice, and this is not an opinion, it’s a fact. Let’s say Starbucks are opening 1,000 new stores across China. This fact would be consistent with your beliefs that Starbucks is going to continue growing and eventually dominate China. As a result, you will absorb that information, because it reinforces your sentiment, and makes you feel pretty good too.
On the other side of the coin, if the fact I provided you was contradictory to your prior beliefs, say Starbucks are closing 1,000 stores in China, what most people suffering from cognitive bias would do is simply disregard the fact because it does not line up with their view.
Humans don’t enjoy the feeling of a loss of confidence, so what often happens is the investor suffering from cognitive bias, will disregard the negative fact and select some piece of information that aligns with their view to provide reason for why the contradictory fact is not important. Fundamentally, humans tend to be overconfident. Which is dangerous as this can lead to us making decisions with the cloud of confidence, when in fact we may not have the entire picture.
What you need to do in regard to the beliefs you currently hold, is acknowledge that you may be entirely wrong, and be comfortable with that fact. 100% conviction in yourself being right is a dangerous assumption to make. Challenge yourself and try to remain as objective as possible when reading new information for the first time.
A lot of newer investors will read over an annual report, but in the back of their mind they know that they already wanted to invest in this company before the fundamental analysis. This will taint your view, and everything will appear through the lenses of rose-tinted glasses. Do not fall victim to that.
Investing, if we can boil it down to a sentence, can be said to simply be about being right than you are wrong. Only through experience, learning, and acceptance that you may be wrong can we get to that stage where we are more often right than we are wrong.
The aim of the game is not to eliminate risks or mistakes, it is to minimize them. Risk and mistakes will always be there. We take no risk; we get no reward. We take no risk, there are few chances we make a mistake.
To summarize my point, if you ever find yourself dismissing contradictory information or data that are facts (as opposed to opinion) then you may be partaking in confirmation bias.
I hope that has brought some insight into your day
Have a great afternoon
IT
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