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Bias-free investing

In the past we made the distinction between the positive and normative blogospheres.  That is the divide between those who talk about “what is” vs. “what should be.”  However when it comes to actual investing the only way to approach it is from the positive perspective.

We were reminded of this by two bloggers today who both note why bias is bad in investing.  In short, it can hurt your investment results.  First, Jeff Miller at A Dash of Insight notes how thinking about ideas like an economist can help:

..I urge a pragmatic approach.  Feel free to express your opinion in blogs, in comments, at the ballot box, or anywhere else you want — just not in your investments.

Meanwhile, if you want to join me in making profits no matter who is in power, you should be a political and philosophical agnostic.

Barry Ritholtz at the Big Picture recently posted a list of ten rules for investing.  He notes how creating rules can help us offset some of our inherent biases.  This most recent list included this item:

Always be conscious of the cognizant biases and selective perceptions you bring to investing. Recognize the same bias in the crowd, the media, and Wall Street. Avoid the herding effect.

The fact of matter is that we all bring our own baggage of biases to the market.  However we can’t use the markets to try and validate them.  Given that this is Masters week we thought we would quote from our earlier post:  Play the ball where it lies:

So to come back to the golf analogy.  The ball is the price of securities as they stand today.  You can buy, sell, short or do nothing.  The course is best thought of as the state of the economy and financial markets.  There is little or nothing you as an individual trader can do about either. You can either choose to play the trading game as it stands today, or as Fernando says best stay on the sidelines.  Because trying to validate your economic or political theories through the markets will likely lead to disappointment.

Bias-free investing may be too high a standard.  It is difficult, if not impossible, to evade our biases.  However to be a great investor you cannot let your personal beliefs crowd out your investment judgment.

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