This post will focus on where our negative emotions come from, why we should be skeptical of our emotions when it comes to investing, and the benefits of overcoming our current emotional state in favor of a longer term view. Many people have a total intolerance for pain, current discomfort, and near term uncertainty. Overcoming our natural aversion to these things will make us better investors.
By Dan Erdle
Introduction
The Pareto Principle, known more popularly as the 80/20 rule, states that 80% of results are explained by only 20% of the inputs. Only a small amount of our time, energy, money, and decisions are responsible for a large amount of our outcomes. The Pareto principle also means that we waste much of our time on things that don’t really matter. In trying to explain the world around us we easily become distracted by noise. Instead, in trying to understand the world, we should focus our attention on figuring out the small number of things that lead to disproportionate payoffs.
There are two things you can do with your money: 1) allocate it to things you want in the present or 2) allocate it to things you are going to want in the future. The choice is between getting a reward today or getting a potentially larger reward at a future date. This is the choice between consumption and investment.
By: Dan Erdle
Overview
The purpose of this post is to explore the many benefits of thinking and behaving differently. I also wish to explore why human nature makes it so difficult for us as investors to go against the crowd. I hope to get across the point that it is unrealistic to expect that if you think and behave like other investors that your results will be anything but average. In order to have superior investing results an investor must develop the ability to engage in independent, objective analysis free from the pull of conventional wisdom or popular thinking. Successful investors will also develop an ability to maintain a portfolio influenced by a high degree of contrarianism.
Understanding Price Declines
By: Dan Erdle
Overview
The purpose of this post is to remind ourselves how we should think about price declines, discuss common misconceptions around falling prices, and touch on specific actions we might take when met with declines. Above else, the key to understanding price declines, as well as taking the correct action in response to them, is understanding the difference between Price and Value. In dealing with this topic it is fundamental that we differentiate the two. We are concerned with Value. The rest of the world is obsessed with Price.
By: Dan Erdle
By and large, inventors take what should be a major positive—the availability of a liquid public market—and turn it in to one of their biggest detriments. They allow daily news headlines, as well as other people’s reactions to these news events, to drive their decision making. The fact that investors have access to daily price quotes, coupled with the natural human tendency to be dominated by their emotions, creates a terrible combination for investors. One consequence has been that the quick and easy ability to buy or sell investments has caused portfolio turnover to increase over time. Today even professional investors, who are supposed to make decisions with stable rationality, struggle to stick with their decisions for even a year.
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