You probably first heard this classic joke years ago. Maybe you even laughed at it once or twice:
Patient: “Doctor, doctor, it hurts when I do this.”
Doctor: “Then stop doing it.”
Yes, it’s silly … and yet wise. We’ve all been known to ignore what is painfully obvious, especially as investors.
For example, even though we know it’s a mistake to buy high and sell low, there’s ample evidence that this is exactly what most of us end up doing anyway. In “How Investors Leave Billions on the Table,” Wall Street Journal columnist Jason Zweig shared a litany of analyses on how investors lose available returns through hyperactive trading. Zweig published his post in 2013, but human nature hasn’t changed, so the stats undoubtedly remain relevant: We’re hard-wired to trade at all the wrong times.
Let’s talk about how you can stop making this mistake. In researching this question, I came across Joseph Hallinan’s classic book, “Why We Make Mistakes.”
A key point made in Hallinan’s book is to beware of reacting to anecdotes, or single observations. At the opposite end of the scale is the body of evidence formed by countless anecdotes, allowing us to reach more enduring conclusions. As we described in our post, “The risks of reacting to recent news,” anecdotes are to evidence what today’s weather report is to the climate. You don’t want to confuse one for the other.
So, one powerful way to lower the number of mistakes you make is to disregard anecdotes, hearsay and hot news when making investment decisions. If the anecdote is truly important, it will end up being integrated into the durable evidence that guides us to less painful investing.
In our next post, we’ll offer a second, related tip: how to steer clear of “junk science.”