“Know thyself” is a maxim that dates back to the ancient Greeks. It’s relevant in every sphere of life, not least investing, where every one of us has an investing bias.
Oh, we tell ourselves we’re being rational, and following rules, but the simple fact is that, as humans, we consistently allow our own biases to factor into our investment decisions. And if we’re not aware of these biases, they can hurt!
Or, as Adam Smith (George Goodman) wrote in his book, The Money Game, “If you don’t know who you are, the stock market is an expensive place to find out.”
So my focus today is on discussing investing bias, and I’ll start with a couple of my own!
My Own Investing Biases
In life, my preference is for new ideas, new people and new things—and so it is with stocks. I have an inordinate attraction to stocks that are not loved by—and often not even known by—the average investor. I rationalize this by telling myself (and, frequently, you) that these stocks have more potential buyers than sellers. And generally that’s true; my biggest winners (AMZN stock bought in 1998, TSLA stock bought in 2011) were unloved little companies that got big.
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The corollary weakness to this bias is that I sometimes ignore the big strong stocks (like AMZN today) that are obvious—and that still have plenty of room to run. (I do, however, have FB in my Cabot Stock of the Week portfolio.)
My second investing bias is a persistent optimism, even in the face of calamity. Sometimes, this can be annoying to people who perceive the current situation more direly than me, but in the long run, I believe that it pays off. After all, the long-term trend of both the world economy and the stock market is up! Or, as Warren Buffett said of the names that have graced the Forbes list of the richest Americans (some 1,500 so far), “You don’t see any short-sellers.”
As to the investing biases of other Cabot analysts, here’s my amateur analysis of a few, starting with my father.
Carlton Lutts, who started this business, had biases too, and like every son, I think I knew my father’s biases well. On the buy side, he favored revolutionary stocks with the potential to change the world, particularly if those stocks were going up fast; he never met a stock that was “too high.”
My father would buy this chart.
His weakness was that he tended to ignore the risks in such stocks, so while he sometimes hit home runs, he sometimes struck out. Losses of 20% or more were not unusual—and he didn’t mind them!
Mike Cintolo, Cabot’s current growth stock guru, is substantially more cognizant of risk. He won’t buy a stock until he sees a low-risk entry point, and he’ll sell stocks quickly when they weaken. The upside to this is that Mike rarely suffers a loss of 10%, or even 5%. The downside to that is that he sometimes misses out on big winners.
Mike would buy this chart.
Also, his high awareness of risk means Mike is very seldom totally bullish. Like the late great Martin Zweig, Mike can usually find something to worry about. But like Martin Zweig, those worries drive him to find lower-risk investments that work.
Paul Goodwin is Cabot’s emerging markets guru, which means he’s supposed to scan the universe of emerging markets stocks for new opportunities. But Paul has a special fondness for Chinese stocks, in part because he understands the country so well. The upside to this is that Paul and his readers have benefited hugely from the bull market in Chinese stocks. The downside is that he sometimes misses opportunities elsewhere.
Additionally, Paul has an inexplicable attraction to intraday charts, which (in my opinion) have almost no value in the long run, but I don’t think his results suffer from that.
Everyone Has an Investing Bias
I could go on and dissect the biases of the other Cabot analysts as well, but you get the point. We all have biases, and when you can honestly recognize your own, and either embrace them or counter them, you can become a successful investor.
Even the great Warren Buffett, generally acknowledged to be one of our era’s greatest investors, has his investing biases; he generally shies away from businesses he doesn’t understand. As a result, he’s missed some enormous profits in technology stocks. Still, he’s done just fine.
So take a few minutes to review your own investing style. What biases affect your investing decision-making, and are the results of these biases good or bad? Share them with us in the comments below.
Timothy Lutts heads one of America’s most respected independent investment advisory services. Each week, Tim personally picks the single best stock in his exclusive Cabot Stock of the Week advisory. Build your wealth and reduce your risk with the top stock each week for current market conditionsLearn More