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Stop fooling yourself

IT may have been British playwright George Bernard Shaw that wrote, “A man gives more careful consideration in choosing a suit of clothes than he does a wife.” While that may seem sexist and misogynist, there is a brutal and logical truth to that statement. It is called “confirmation bias”.

Confirmation bias loosely manifests itself in three ways. The most obvious is that we see what we want to see. If we do not see or cannot make ourselves see what we want to see, we “fill in the blanks”. Finally, we take what we actually do see and make false conclusions.

Go to the department store and try on a shirt. If the thought comes to your mind that, “This really doesn’t make me look fat does it?” and your answer yourself “No”, that is confirmation bias. Yes, the shirt does make you look fat but you are letting yourself see what you want to see.

There is one five-star men’s tailor in Manila that sells great and unique fabrics. The tailoring is superb and the clothes fit exceptionally well. Your feel exactly what hand-tailored clothes should feel like; that it was made just for you. But everyone that I have talked to that has had a suit of clothes made there says the same thing. The thread used to sew on the buttons is of the lowest quality possible. Expect your shirt to lose a button or two within the first month. No amount of confirmation bias can ignore that fact. But it is with situations that are more of the heart —like relationships—where confirmation bias really kicks in. We may be strongly attracted to person but have not known them long enough to make a reasonable judgment as to their kindness and empathy. But because we have not actually seen them pull the wings off of flies or kick the family puppy, we assume them to be gentle and loving human beings.

If we actually see that other person whack the puppy on the side of the head, our confirmation bias may take over and we justify that action as that the dog probably deserved it.

Too many investors come to the stock market with the same attitude as they do when they are looking for love.

Every successful investor knows that there is one absolute certainty in the universe. The stock market is going to do what it wants to do. Your prayers, pleadings and passions are not going to change that. The stock market is a cruel mistress but one who will share her secrets if you are willing to listen.

A stock position moving against you can be like the death of a loved one. You can go through the five stages: denial, anger, bargaining, depression and acceptance. Unfortunately, by the time you get to acceptance, you may be broke.

Your cognitive bias keeps you believing, even as your stock is turning your puppy into adobo. A stock price that is going down and particularly after it has broken below support does not deserve any benefit of the doubt. There are no blanks to be filled in with hope and good thoughts. Further, a stock-price drop is not a “correction” until it goes back up. That thought is a false conclusion. The only thing you need to see and accept is that the trend is negative.

You want to be a stock-market winner? Then stop fooling yourself. Everything you need to know to be a successful investor is right in front of you. Remember, “There are none so blind as those who will not see.”

****

E-mail me at mangun@gmail.com. Visit my web site at www.mangunonmarkets.com. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.

 

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