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a plague o both your houses

Three cognitive biases that stop me from making more money (from IKN440)

This was the main intro piece from IKN440, out last Sunday evening. I have redacted the names of companies used as examples as they’re for subscribers. The rest as-is:
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Three
cognitive biases that stop me from making more money

What are your hang-ups as an
investor? One thing is true without a doubt; we all have them. From there, most
investors are aware of their weaknesses, the smarter ones work on them to get
better at this crazy game. The individual investor (or even the fund manager,
as long as they don’t work for Ray Dalio) tends to do this in the private
sphere, it’s not easy to go around boasted about one’s weaknesses but what with
being the author of a weekly publication that is based firmly and squarely on
what I’m doing with my cash, coupled with my constant exhortations that “I am
not you” and you should take the information provided here and use in for your
own circumstances, I’m at the point where this subject has irritated me too
long, it needs to be aired. Therefore today you get an overview of what I
consider to be my main weaknesses as an investor (though as you’ll see, even though I consider one of them a sensu
stricto weakness I’m not in any hurry to do anything about it
). There are
others of course (and if you feel like it, you’re very welcome to write in and
tell me if you think I have other blind spots that have gone un-mentioned
today), but for my taste and perspective there are three big ones and they go
like this:

1) I am
overly loyal to a story.
In other words, I tend to hang around too long when a
stock’s development isn’t going according to its original plan. The problem
here is often on a personal, human level rather than statistical or (lack of)
results-driven and starts with the way in which I prefer betting on companies
with strong, stand-up management teams with integrity and values. Once in, my
weakness is to consider my position as a sponsorship and a moral backing. So
when things don’t go to plan (and in mining “when” is better than “if”, more
depends on the size and gravity of the problem) I get a dose of loyalty. Maybe
not such a bad thing, but the issues start with “overly loyal”, the header of
this point. Sticking with a team is fine, being stubborn and backing good
people that don’t deliver isn’t so great. The best example of this one in my
open list at the moment is (redacted).

The solution, one I work on
actively, is to be a bit harder-nosed about selling when the story as it
unfolds fails to match (or sufficiently match) my own expectations when I made
the original purchase. As evidence, the way I sold (redacted) before the drop kicked in has worked well.

2) I’m a
sucker for a Value Trap
. This one is well documented round these parts. The
numberwonk in me filters through the sector, finds the stock that’s cheap
“considering what it has” and buys it. The main problem is that even if it goes
up with the market, it’s always going to be “comparatively cheap” to peers and
my hang-up shines through, it’s tough to sell even at a profit. Value is one
thing and I consider it a positive that I search and find such stocks. The
issue is with “Trap”, the companies that don’t attract market attention or bids
because they’re poorly marketed, they don’t develop their project as expected
(see point one), they out-run retail holders by diluting benefit away using
placements, those and a list of others. I’ve really been trying to work on this
weakness of mine and on my list of open stocks today, perhaps two can be
described that way (though I’d argue against), the potential culprits in order
of likelihood being (redacted).

3) I find
it difficult to buy a “bad” company.
This subject grates on me for two
reasons. A great example of this are the mid-sized copper producers such as (redacted) They’re so badly run, insular, shareholder unfriendly and spend half their time
just on either side of the breakeven line that I find it painful to consider
how they’re sold to people as quality mining vehicles. However, I’m also the
first to recognize that they’re exactly the type of stock to own (maybe “trade”
is a better word) when the underlying market for copper makes significant moves
in either direction. It’s partially due to their high cash cost and partially
due to the very fact they’re run by mediocrity that makes them great trades if
there’s a big move in copper (either direction, going long is most
accessible to us retail for Canadian listed stocks), but try as I might I just
can’t get myself to go long. Education inhibits risk taking, or to quote Hamlet
for the umpteenth time “Thus conscience does make cowards of us all” and
backing a company that’s obviously badly run is tough for me, even when it
becomes patently obvious that due to outside factors it’s going to give you upside leverage.

However…and this is important, I
really don’t feel like working on this weakness of mine! Unlike points 1) and
2) above, even after recognizing this inhibition to greater stock market
profits I actively prefer not to do much about it. For one thing, if I use my strengths
as an investor there are still plenty of other vehicles to choose from that
will provide me with a market win (e.g. identifying (redated)). For another, there really is more to
life than simply making money for me, the Paul van Eeden “Better Sleep
Principle” has a corollary here and I just cannot feel relaxed about my
sponsorship of mediocrity just because I can ride their backs for a few
shekels, I much prefer to back people who do the right things in the right way,
with the ideal that eventually the way in which business gets done may improve
somewhat. All flowery and pie in the sky stuff, perhaps, but I sleep better
that way. Life isn’t all about money.

Bottom
line:

The idea is that with those three in mind you get a better peek into my mindset
and reasoning behind the trades published here in The IKN Weekly. Another bow
in the quiver when deciding how to use the information provides for your own
circumstances.

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