Why Your Brain is Sabotaging Your Portfolio

0:00So the market is basically a stress test for all of our decision making, right? When things are calm, everything's gravy. We're all disciplined. Everything looks good. But when things get loud, when we start seeing red days, scary headlines, everyone's screaming recession, that's when we find out what we're truly made of, what our processes are truly made of. So today, Andrew and I are going to dive into some of these mental reflexes that we might have and how they show up under stress and some simple guardrails we can put up to stop them from wrecking our performance. Buckle up. Here we go. I remember starting my first business.

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3:10Stephen:and stick with them. Your path to financial freedom. Start now. And welcome back to the Investing for Beginners podcast, everybody. My name is Stephen Morris, and he is Andrew Saylor. And hopefully you can't hear the lawnmower, the landscapers out behind me if you can. I hope we can edit that out. So anyway, assuming that everything is gravy on the audio end, Andrew, today we're talking about fallacies and biases. Um, what would you say your biggest fallacy is or biases when it comes to your investing? Oh man, that's a tough question. Like there is definitely a lot. One I really struggle with is anchor bias.

3:58Stephen:I can't help but look at a chart. And if a stock is down recently, I can't help but get excited. I just automatically as if I was at a store and it said clearance rack, that's immediately what I think when I see a stock chart that's come down. And obviously that's not the best kind of way to think about stocks. Mine is definitely action. We've talked about this before. Like I just get itchy. Like, I don't know, like I'm an addict or something. I just need to go do something. And it's, it's so frustrating for me because I know like that's wrong like in my head it's like no you don't you're fine you just don't even log into your brokerage like don't even feed the beast but man it's hard dude like it is so hard not to get even when you know it's there like you're saying like the anchoring bias totally understand that you know it's there but it's so hard to just ignore it and not feed it it it's crippling sometimes so are you like literally sometimes jittery in your chair yeah like i i'll pick like i i'm one of those like i'll pick up my phone and then i'll set it back down then i'll pick up my phone and i'll set it back down like you know like a smoker trying to quit smoking like i'll pick it up and smell it and put it back down like that that's literally what i do like until finally like what I ended up doing, you know, spoiler alert, my strategy for beating that is, um, I just, I give, I give myself a specific amount of money and a separate brokerage where I can just kind of like swing trade and day trade just as I feel, but it is not to make me money.

5:48It's, it's definitely a waste of money, but it just scratches that itch because obviously I don't want to mess up my portfolio but i had to do something because it was driving me crazy and we've talked about a million times like one of the worst things you can do is tinker with your portfolio and so like that's what i was doing because i i think just because i was bored and i needed i felt like i

6:15Stephen:needed to take action so yeah like can we identify a trigger like is it you see a headline or you see something on a chart and then just instantly reflects you pull your phone out no I honestly like I think I said it the best I possibly can I get bored you get bored like it's like okay I'm bored you know like some people like pull up you know TikTok or Instagram I pull up like my brokerage account trade stock like like literally it's just because I'm bored and I want to do something. And so I mean, and I don't know, man, it's a dopamine rush for sure, like buying and selling stocks. And so I think I just I got addicted to it.

7:08When I started like, Oh, this is cool. I can make money. And then, you know, gradually, I came to this side, you came to the dark side. And but like I still have that itch to like trade like and so yeah I had to do something like I had to take some sort of action but that's and that's the thing I think Andrew we really want to cover today isn't just I guess one is knowing the fallacies are there or the biases are there identifying what yours are and then finding a way to mitigate it because some of these things You know, my bias towards just needing to take action really can destroy your portfolio over a long, long time period.

7:58Maybe not even such a long time period. It can probably do it pretty quick if you're not careful. So, I mean, you know, that anchoring bias, like that can really hurt you fairly quickly if you don't find a way to try to mitigate some of its damage. And I think that's really, I guess, again, spoiler alert, the key lesson we're trying to make today.

8:24Stephen:Yeah, hopefully we can come out with something actionable for both of us. So, so let's jump right into it. The first one on my list that I think probably this, and this doesn't bother me too much, but that's the salient bias. And just quick definition, that's when you put too much weight on what is loud. So, you know, whatever's in the headlines, whatever is screaming the loudest in our ears, in our minds, it's on social media, it's on the news, it's everywhere we look. That gets much more weight put on it than should be. So a good example is like SpaceX. They just IPO'd, I think, last month. And all my friends were talking about it, right?

9:18Like, everyone's like, oh, SpaceX, SpaceX. And I'm like, do you trade stock? And they're all like, no. Like, do you own stocks? Some of them, yes. Some of them, meh. Some, most, no. And it was like, it's not going to make you money. Stay away from it. And, but everyone heard, like, oh, SpaceX, biggest IPO in the history. And it felt like because it was such a big headline, everybody needed to be involved in it or they were going to lose money. Now, the IPO did make people money. It made people a lot of money. Not investors like us, but, you know, it did make people a lot of money. But how many people, I wonder, ended up losing money because they bought into the headline.

10:07and so that that would be my biggest or the very first one i think is probably the most prominent for people and that's just my opinion i totally could be wrong um i avoid this andrew because i just don't give a crap what the media says like i ignore the media like they're the plague like i just stay away from it altogether so um it's easy for me to

10:31Stephen:ignore stuff like that yeah and we were talking off air too but you're not really on social media either much right like definitely not compared to like someone like me or or a lot of maybe stock pickers and investors out there and i think yeah the the media for sure that can be a really dangerous place to get information and i think a lot of people who listen to podcasts kind of understand that inherently. But social media has another place that can bring that. And what's devious about social media is it will feed you whatever noise you're gravitating towards. Like there's a documentary about it that was released back in like 2020, maybe 2021.

11:22Stephen:But the algorithm continues to feed. So if you start going down the dividend rabbit hole or you start going down the growth investor rabbit hole, the quality investor, the value investor rabbit hole, it just starts feeding you that type of content. And you start thinking that, well, there's so many people agreeing with me, so I must be correct. And that's not always the case. What we've seen in markets, if you look at the history of it, and if you look at even recent history, like we've done episodes about how tech stocks are really out of favor right now. But you just rewind a couple years ago, the noise was all about tech stocks everywhere on social media when it came to the stock market.

12:08Stephen:So we have to understand that these kind of identities, this noise that generates around the type of stock or a type of person or whatever it is, it cycles its noise. And so we do need to try hard to differentiate between what is everybody saying that sounds good and it tickles our ears. So we like to say it and we hear it and we say it again. And how much of that is just noise perpetuated by the algorithms? and how much of his actual fact that's based on knowledge, that's based on logic, hopefully based on data, stuff that we can actually make investments with rather than just stuff that's all around us and not really helping us.

12:55I love that. And I think, like you said, it's the best. And so I think when I was trying to think of this, I was trying to put myself in your shoes because, like you said, you're on social media.

13:13How would I try to decide whether what I was hearing is noise or if it's something valuable I need to pay attention to? And I say that intentionally because half the stuff we hear news cycle-wise, there's no value to it. It's all just, you know, to garner attention, clicks, you know, whatever source you're paying attention to. But it's all just to capture your attention. Even if the, you know, news is only 50 % true, that's, I think, being generous. You know, it's all designed just to capture you. So I would say the very first thing I would ask myself is what changed? Did something change that is causing this to be a headline right now?

14:15The next question I would ask myself is, is this going to be a one-day story more than likely, or is this going to be a trend over the next two, three, four years? and then what would I think about this if I didn't see the news like if it just came to me from a friend what would my thoughts be outside of the noise if that makes any sort of sense but like I said I'd be interested to hear what you have to say because this isn't something I struggle with so I may have totally miss the ball with those. I like

14:58Stephen:those. I don't know. I like to think I don't struggle with this also. Maybe we all think maybe that's where the bias comes in. I'm not sure. It's just one of those things that being aware of it maybe can help you understand like, I don't know. Like I noticed I started watching one or two videos that focused on negative things about big companies that we all are familiar with. And then I noticed that this YouTube channel does that for like every single company on the planet. So then like, I don't know, I was just aware that, okay, this might be more of a biased source, right? That like the information they're providing is very, there's a very clear template of what they're using.

15:49Stephen:So maybe going back to what Charlie Munger says, show me the incentives and I'll show you the outcome. So if you can figure out what are the incentives of this source of information, then I can either take it with more of a grain of salt or maybe less of a grain of salt. So going back to my example, if I know that this YouTube channel just constantly finds any problem with any company it can find, then I take what they're saying with a grain of salt, because I know that that is their shtick is to find ugly things about companies, regardless of how egregious it might be or not. that's a great example though because you know that shows up in your in your algorithm in your feed and you may not know that that's their their shtick that's what they do yeah so you see this and you don't know to take it with a grain of salt and i think that's where this all comes comes to to to a head is you know always examine the source and i do think it's funny too andrew because I just had the thought while you were talking, every single person that you talk to, I'll almost be like, oh, I don't pay attention to the news.

16:59And it's like, okay, whatever. We start talking about anything. I guarantee you're going to repeat at least one or two things you heard on the news. And I'm guilty of it, too. I'm not saying I'm any better. it's just you know it's that that's the whole point of the salience bias is it's so loud it's so in your face it's unavoidable so that's the first one august is national wellness month but

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20:08Stephen:Read found fee schedule. What's the best way to get started in the market? Download my ebook for free at stockmarketpdf.com. Number two, Andrew, is the anchoring bias. And the anchoring bias is when you log onto an initial target thought, metric, chart, piece of news, piece of evidence that supports almost what you want to think. And then what inevitably ends up happening is rather than researching, you start searching for evidence to back up your thesis rather than trying to research and develop a thesis. So it's basically you're like reverse engineering your thesis. You've already built it and now you're trying to prove it.

21:09And that can be a very, very, very dangerous playground to play in. Yeah.

21:17Stephen:And just pulling on that a little bit, the brain wants to quickly solve things because Because when you have that decision about a stock that you haven't made, it takes a lot of energy and effort to try to gather facts to make a decision on it. And so your brain wants to just make the decision to get it over with, get it out of your head so you can move on to other things. And like you're saying, that's so dangerous because we're wrong so much of the time. So would you rather be wrong and just be wrong for the rest of your investing career? Or would you rather learn the skills to be right more often?

21:55Stephen:And so digging into the truth and trying to avoid some of these biases can be a great way to do that. I know for me, like when you mentioned hyper-focusing on a metric, that's one that I fall to easily because I like to think that there's a magical formula that just can make something super simple. So if it's just one good metric and this single metric tells me that this business is better than all of these other businesses. And of course, we know the real world doesn't work like that. There's just other factors at play. And so I don't know if the best solution, but just trying to be humble, I guess, is probably the better way to go for me personally.

22:47Stephen:If I'm humble, then I'm admitting that maybe I don't know the answer yet, which is fine. I'm not saying I don't know the answer, period. I'm saying I don't know the answer yet. So I'm going to do more research and keep an open mind when I'm doing that research until I finally come to a conclusion. And so for me, the antidote to this is humility and saying, I don't know the answer yet. So let me do more work on it. Yeah, again, I don't really struggle with that aspect of it as much. I would say that when the angering bias hits me, it's because I think a company is cool. Yeah. And I get anchored around that thought that like, this is a cool company.

23:31It has to be a great company just because it's cool. You know, whether it's what they're making or their business practices or whatever. And that I can definitely see in the past how that's made me kind of initially blind to some of the negative things. And a great example of that is I always forget his name. But that company I pitched you that makes basically their electric aerial vehicles, like personal aerial vehicles, which, I mean, super cool. And we're starting to see a lot of this type of thing where people are just able to hop in a one-man kind of helicopter and go from point A to point B.

24:24um and so i mean like that's just so fascinating and cool to me the company's not done so well so far um surprise surprise and like looking back in hindsight it's like well duh like there's a lot of regulations that aren't out about this because like you don't need a pilot's license to fly these things so like like that's a big deal like there's you know unfortunately like there are going to be accidents that are going to happen which is going to force regulation like there's all kinds of unknowns about all because this is uncharted territory so obviously like it's the stock is going to struggle no matter how cool the company is and how groundbreaking it is so i mean like that that's i would say where i struggle with anchoring is just in the idea of the company itself.

25:19I think once I start getting into the research, I'm able to fairly easily abandon that fallacy. Sometimes. Sometimes it sticks with me and I need help. But for the most part, I think I'm able to avoid it. So just some, why would you say are some good rules to help people mitigate the damage that this bias can do?

25:50Stephen:Well, since you and I both had a unifying answer that we both agreed on, I think the answer is do more research. And so if you can put rules around that, whether it's I'm going to read the risk factors for every company that I that I investigate risk factors on the 10K, or I'm going to read the a business overview, or I'm going to run these three metrics. I'm going to have a checklist and just follow those rules for every stock so that you're not skipping vital research pieces. That can be a great hard and fast rule to do. It's because it will force you to look at the balance sheet or look at, to your point, like, are there regulations?

26:36Stephen:If you're doing that for every company, then you'll have a better chance of finding those warts. And hopefully it spurs you to do more and more research and then you can free yourself of this bias. Definitely. The next we've already talked a little bit about, and that's action bias. Like I said, that one kills me. Just I need to do something. I don't know. The crazy thing about this is when I talk about it, I feel like I'm the only person in the world that has this this itch that just needs to go trade a stock. I hope I'm not, but I feel like I am. And I think that's how, you know, it truly is your like number one bias is because a lot of times with things like this, like that's how we feel like, oh, you're not going to understand because no one else feels like me.

27:31type mentality. Um, and that's true on so many different things other than just this type stuff. But I think that holds true even for this. Um, and that's definitely how I feel. Have you ever had that? Like, I just need to go trade a stock. Like I just need to sell something.

27:50Stephen:So when you described it, like I'm bored, so I compulsively do this. I relate with that big time. for me it's Instagram like I just compulsively open Instagram and then what's bad about it is like I get stuck and I was joking with my wife I'm like I'm stuck in an Instagram hole and she's like then get out of it and I'm like I can't and then like there's been times where she just like closes the app for me and I'm like oh thanks so what I ended up doing just an idea but like I literally put a time limit on Instagram on my phone so it literally forces me out of the app if I'm in there too much because I've been too compulsive and I'm finding myself in there.

28:32Stephen:So I don't know if that's something you could try or if that's just completely doesn't help whatsoever. I don't think that would help because it only takes me a second to buy and sell the stock. It doesn't take me long. Can you put like a speed box, like two factor authentication or something? Honestly, I think what I came up with is the best and like you know every every once a month when i get paid a small amount of of that goes into my my uh trading brokerage and i i look forward to it and it's so hard not to just spend it all that day and but i mean um that i think that is the best solution is just give myself a way to like appease it and i'm sure there's like a psychiatrist listening they're like no you are totally doing the wrong you're just making it worse in the long run so whatever i'm sorry like but that i for it works for me and at least right now it works and i think i and i don't think it's my mind wanting to hurt me and real quick before i'd get into that But something I didn't cover is why this can be so destructive to your portfolio.