Why Most Investors Lose — and Don’t Even Know Why
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Over the years, I’ve tried my darndest here to help investors and point them in the right direction. But time and time again, individual investors doing it on their own with the trading software, the apps, doesn’t make any difference. They always lose. I actually saw an E-Trade commercial this past week. I don’t watch a lot of TV and I caught this commercial. And this E-Trade commercial was touting their trading software.
And it had these traders sitting in front of multiple screens. I mean, it was like one, two, was like eight screens and charts and graphs and colors, crash bang, boom, wow, look at all this stuff. yeah, we got pattern recognition. We got this, we got that. You will lose. You’re gonna lose. Time and time again.
statistics, the numbers prove it. Terrence O’Dean did it back in the 1990s. He studied all the discount houses. Same thing today. Today, actually even worse than it was back then with the various different dark pools that are out there picking you off. They buy and sell your track. You don’t have a shot. Investors, on the other hand, different traders.
No. I want to share with you something. I often talk about this gentleman here on the program. have an enormous amount of respect for him. He is a great thinker. He is a great risk manager, philosopher. His books, some of most influential books of the 20th century or 21st century, whether it be Fooled by Randomness, whether it be The Black Swan.
I go on and on. Anti-fragile, I’ll talk about that. Skin in the game. All must read books. I want to go over his, I wonder if we’re fooled by Rand’s first book here. He talks a little bit about the behaviors that human beings engage in where it leads them down the wrong path. The past is always deterministic.
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We overestimate what we knew at the time of the event due to subsequent information, which is known as hindsight bias. Why? People’s brains are not made to analyze why things happen exactly. That takes time and is less relevant than what will happen next. It’s funny. So, you know, I try to…
tell kids this when I’m coach sports, same thing. know, make fast mistakes. Gonna make a mistake, forget about it, move on. See, Ted Lasso did that in the television show, so you gotta have the brains of a goldfish, 10 second memory. Anyway, when you rate your investments, try to assign vague probabilities to scenarios. That way, after the event took place, you won’t be fooled into thinking it was obvious all along. yeah, I should have known that. Right.
Luck mistaken as skill. This is a great line. There is one world in which I believe the habit of mistaking luck for skill is most prevalent and most conspicuous, and that world is the world of markets. Markets are the perfect place to mistake luck for skill. The real risk an investor took is impossible to know. Investing processes are opaque. There’s an incentive to look skilled, and investors
want to believe they’re good at what they do. There’s a loyalty to ideas. The world is ever-changing. What’s right today can be wrong tomorrow when the circumstances change. Being married to ideas is a safe way to an unsuccessful investing career. Options and ideas should change with the facts and deal with the terrain. Probability and skepticism. In reality, probabilities aren’t.
a mathematical problem as they are in textbooks. We don’t know the different scenarios. We don’t know any of the odds. So it’s not about solving a mathematical problem. Again, they get you thinking. They got all the software, all this math. You gotta figure it out. You’re not. It’s about being attentive to the fact that we don’t know everything we would need to know. Highest sign of intelligence. You don’t know what you don’t know. Okay? You realize that. You don’t know what you don’t know. We are dependent.
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on luck in some circumstances. In the investing context, this lesson will make us use a margin of safety. Never let risk lead to ruin. Many more when it comes to this. I’ll discuss it this weekend on the radio show. But again, man’s got to know his limitations. Watchdogonwallstreet.com.
