You are not as right as you think you are

Vitaliy Katsenelson, CIO at Investment Management Associates , blogger at ContrarianEdge and author of The Little Book of Sideways Markets: How to Make Money in Markets that Go Nowhere makes an excellent point about seeking out conflicting opinions in a recent blog post. We have a tendency, especially after we have made a decision, to seek out information that confirms our prior decision. In some cases we never even take in that information. Therefore confirmation bias something we as investors need to consciously offset. Not everyone wants to hear they are wrong, but it is the only way of really putting our assumptions and analysis to the test. Katsenelsen writes:

When you are long a stock you are naturally trying to seek out investors who have the same opinion, and naturally stay away from those who have contrary views.  Instead, we should try to do the opposite, seeking out smart people who, after doing their research (a very important point), came to a different conclusion from ours.  This point is a bit more nuanced.  If I talk to a momentum growth investor about Xerox, I know exactly why he’ll be avoiding it; there is no momentum in the stock price.  His view will bring me very little insight.  However, the perspective of a smart fundamental investor who’s done thorough research but arrived at a different conclusion might be very valuable.  When we find someone who disagrees, we need to identify exactly where the differences in opinion lie (assumptions, new/missing important data points, etc.) and then methodically and objectively try to refute those points.  If you cannot, maybe you are not as right as you thought you were.

Finding those people who can challenge your opinions is no easy matter. That is one of the benefits of blogging and engaging in social finance: seeking out conflicting opinions. This process is hard work, then again no said investing was easy.

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