A human brain weighs around 3 pounds. About the same weight as a 13″ Macbook Air. Each operates well for the tasks it undertakes. However the human brain often fails us when it comes to investing. Shane Parrish at Farnam Street writes:
There’s at least one other way our system “saves us from ourselves” on average — our overestimation of self. Social psychologists love to demonstrate cases where humans overestimate their ability to drive, invest, make love, and so on. It even has a (correct) name: Overconfidence. Yet without some measure of “overconfidence,” most of us would be quite depressed.
The vast majority of investors are highly overconfident when it comes to their investment acumen and investment returns. Nobody says you need to be depressed to be a good investor but some perspective is healthy. Spencer Jakab author of Heads I Win, Tails I Win: Why Smart Investors Fail and How to Tile the Odds In Your Favor in a Q&A on this site stated:
Probably the most surprising thing I found in doing research for the book is how unaware people are of their own historical returns other than a vague sense that they really should have more money. If people had to rate themselves from zero to 10 relative to all investors and also relative to the market, the median guess would be a 7 on both. The reality is that they’re a 5 and a 2, respectively.
This overconfidence in our abilities prevents us taking the steps necessary to become better investors. Any skill, but especially investing, requires deliberate practice. Feedback is a important component in this process. The problem is that investors don’t take the steps necessary to generate this kind of historical information. So not only are our returns estimates off but so are our ability to require our investment theses at any point in time.
It shouldn’t be surprising that we in the blogging business are high on the opportunities from keeping a trading journal. David Fabian at FMD Capital writes:
Start an investment journal. It doesn’t matter if you are an expert day trader or a buy-and-hold index fanatic. There is so much to be learned in the process.
The act of logging your trades, creating a watch list, noting questions to be answered, or simply charting your progress is very influential. It will help keep you accountable to your own goals and allow you the flexibility to revisit things years down the road that you may otherwise forget.
Investors like poker players, baseball pitchers and hockey goalies need to forget their most recent ‘bad beats’ so that they can move on. Moving on does not relieve you from the responsibility from learning for those experiences. As I noted in a recent post:
We cannot become better investors, writers or people without some conscious process to make the internal, external. Investing, including diversification, is by its nature a disappointment machine. There is always something to regret in hindsight. The challenge therefore is to use journals to help us learn from our past and then safely leave the past there where it belongs.
If you can’t commit to a full investment journal process at least figure out the return on trades and overall portfolio. Transform your “vague sense of returns” into something more concrete. This would be a great first step.