Taken from the Big chill of 1983:
Michael: I don’t know anyone who could get through the day without two or three juicy rationalizations. They’re more important than sex.
Sam: Ah, come on. Nothing’s more important than sex.
Michael: Oh yeah? Ever gone a week without a rationalization?
Self-deception is especially costly when it comes to investing. So let’s consider some of the lies that a lot of you may be telling yourselves and the impact they may have on your portfolios.
- You know what your investment returns are. You would be surprised at how few people actually know what their returns are. Even fewer understand their performance relative to a benchmark. It is not that complicated to correct this. Set up a simple spread sheet using Microsoft Excel or Google Drive or one of the available online tools. Keep careful records of your portfolios, cumulative and YTD returns, and you will avoid the “performance delusion.”
- You can predict the future. You may not say you believe you can forecast what will happen next year, but you certainly behave that way. Whenever you try to pick market tops and bottoms, you are making a prediction. Guessing what stock is going to outperform the market is forecasting, as is selling a stock for no apparent reason. Indeed, nearly all capital decisions made by most people are unconscious predictions.No one can consistently predict the future with any degree of accuracy. If your investing approach requires that you become Nostradamus to succeed, then you are destined to fail.
- You know how costs, fees and taxes impact your returns. Not too long ago, an acquaintance was bragging about what a great year he was having. And truth be told, his gross returns were impressive. Perhaps we need a corollary rule about active trading: Gross returns don’t count, net returns do
- You can pick fund managers. Yes, we all know who the great fund managers of the past 20 years were, but that’s after the fact. What makes you think you have the skill set to evaluate the best ones of the next 10 to 20 years — their investing approach, discipline, character and ability to express their investing thesis? Only 1 percent of fund managers actually earn their fees: Why do you believe that you can pick them out?
- You have a plan. I am constantly astonished at how few people actually have any sort of long-term plan other than throwing some money.
- You can pick stocks. Let’s be brutally honest about this: Discussing specific stocks during a bull market is loads of fun. Chatting about new products, management and exciting new technologies makes for great cocktail party chatter.
The problem is that most of us lack the specific skill set to do this well. This includes understanding valuations, recognizing problems early and, perhaps most of all, following your discipline to limit losses when things don’t work out.
I have just taken few of the interesting ones: To conclude everybody lies — every day; every hour; awake; asleep; in his dreams; in his joy; in his mourning.”