Handling Investing Biases

[Seoshin]

As the title above says, I wonder how ya'll handle your own investing biases? What measures you routinely implement and how you deal with it on a recurring basis? Mine I have a bad anchoring bias before and won't add to a position until it reaches to my cost basis but have learned throughout the years that adding to my winners has done well than averaging down to my losers. If the business keeps executing well and exceeded expectations, why not water the flowers more?

I'm curious as to what others do and also want to learn from the veterans here. Cheers!

[Saluki]

I think the best thing that you can do is be aware of it and think about it when you see it pop up.  I have that anchoring bias with price too, but sometimes I start out with a blank piece of paper and say "now it's earning x and buying back stock. why isn't a buy at this price." It's what helped me buy more STNG last year at $40, when I had paid $12 a couple of years before (now it's $82), or bite my lip and pay $50 for JOE when I paid $15 for it earlier. 

 

Another common value investing bias I have is selling too early because it reaches a price I wouldn't pay.  But when I look at things that I've passed on because they were too expensive, and if I had owned them I would have sold, it's a weird revelation.  For instance, I recently bought MSCI which had always looked too expensive to me.  But, even after the recent selloff, it has compounded at almost 20% a year since it went public.  The safeguard I put in place is that I can buy anytime, but to sell after earnings come out. If it's not after an earnings report, then it's just responding to price fluctuations, not fundamentals about the company. 

 

One that I'm consciously working through now is a variation on confirmation bias.  There was an experiment in horse betting where professional gamblers were given a certain amount of datapoints (10?) and told to bet on some horse races and give their confidence level.  The data included things like past speed at races, number of races in the past month, success % of the jockey etc. Chance would predict a 10% success level, but they managed 17%, so the data was useful.  When they gave them more and more datapoints, the success level stayed the same, but their confidence in the bet often doubled or tripled.   I have a 3% position in CPNG and a 1% position in ATEX. As I seek out more and more info on these, I'm tempted to go bigger because I feel like I've got a handle on it.  But I'm reluctant to go much bigger on them because I think my initial assessment about the confidence in the outcome is correct.  More data makes me feel more sure about it, but nothing about the fundamentals, or the competitors will change because of my confidence. 

[Gregmal]

Avoid them, ignore them, or if confident enough, take the other side of them. 
 

Most obvious example is related to stuff that looks “expensive”. If I’m looking at something and see the PE I can just laugh and go “nice Greg. Excellent proprietary work there. Definitely arriving at a different conclusion than every other jerk off with screen access!”. At which point I’ll look for other more unique analytical angles, or simply move on.

 

Overall biases are an asset because you know this is often prevailing sentiment and if you can manipulate that you’re already going against the consensus 

[ValueArb]

One thing I got from Buffett is to always try to come up with a decent estimate of intrinsic value before looking at the price. If you come across what looks like a great business it's easy to bias yourself into over-estimating its value if you know what price you have to reach in order to own it.  I try to have reasonable standards and stick to them.

 

This is really important for the softer, more subjective factors. More specifically if there are intangibles that I really like about a business, I really want to give them a value before I know the price because it's so easy to give them an arbitrarily high value. 

 

Another technique that helps limit bias is to keep generating new ideas and have a deep bench of businesses you'd like to own at the right price. This makes it easier to be patient and avoid jumping into mediocre opportunities when you have a lot of options to compare against. 

[Seoshin]

2 hours ago, Saluki said:

I think the best thing that you can do is be aware of it and think about it when you see it pop up.  I have that anchoring bias with price too, but sometimes I start out with a blank piece of paper and say "now it's earning x and buying back stock. why isn't a buy at this price." It's what helped me buy more STNG last year at $40, when I had paid $12 a couple of years before (now it's $82), or bite my lip and pay $50 for JOE when I paid $15 for it earlier. 

 

Another common value investing bias I have is selling too early because it reaches a price I wouldn't pay.  But when I look at things that I've passed on because they were too expensive, and if I had owned them I would have sold, it's a weird revelation.  For instance, I recently bought MSCI which had always looked too expensive to me.  But, even after the recent selloff, it has compounded at almost 20% a year since it went public.  The safeguard I put in place is that I can buy anytime, but to sell after earnings come out. If it's not after an earnings report, then it's just responding to price fluctuations, not fundamentals about the company. 

 

One that I'm consciously working through now is a variation on confirmation bias.  There was an experiment in horse betting where professional gamblers were given a certain amount of datapoints (10?) and told to bet on some horse races and give their confidence level.  The data included things like past speed at races, number of races in the past month, success % of the jockey etc. Chance would predict a 10% success level, but they managed 17%, so the data was useful.  When they gave them more and more datapoints, the success level stayed the same, but their confidence in the bet often doubled or tripled.   I have a 3% position in CPNG and a 1% position in ATEX. As I seek out more and more info on these, I'm tempted to go bigger because I feel like I've got a handle on it.  But I'm reluctant to go much bigger on them because I think my initial assessment about the confidence in the outcome is correct.  More data makes me feel more sure about it, but nothing about the fundamentals, or the competitors will change because of my confidence. 

I like the napkin like approach! It's the same with if I start over again, will I buy this at current prices? 

Wondering about how you assign weighting on your confirmation bias, do you scale up more on portfolio weighting as you know more or you're happy with more data confirming what you know?

[Seoshin]

2 hours ago, Gregmal said:

Avoid them, ignore them, or if confident enough, take the other side of them. 
 

Most obvious example is related to stuff that looks “expensive”. If I’m looking at something and see the PE I can just laugh and go “nice Greg. Excellent proprietary work there. Definitely arriving at a different conclusion than every other jerk off with screen access!”. At which point I’ll look for other more unique analytical angles, or simply move on.

 

Overall biases are an asset because you know this is often prevailing sentiment and if you can manipulate that you’re already going against the consensus 

A contrarian approach I see. But how do you know you are right when majority is taking an opposing side of you? but thanks Greg for providing insight. I always like your replies on other posts and learn a lot from them.

[Seoshin]

30 minutes ago, ValueArb said:

One thing I got from Buffett is to always try to come up with a decent estimate of intrinsic value before looking at the price. If you come across what looks like a great business it's easy to bias yourself into over-estimating its value if you know what price you have to reach in order to own it.  I try to have reasonable standards and stick to them.

 

This is really important for the softer, more subjective factors. More specifically if there are intangibles that I really like about a business, I really want to give them a value before I know the price because it's so easy to give them an arbitrarily high value. 

 

Another technique that helps limit bias is to keep generating new ideas and have a deep bench of businesses you'd like to own at the right price. This makes it easier to be patient and avoid jumping into mediocre opportunities when you have a lot of options to compare against. 

Love the last part! I am accumulating more on my watchlist and named it aptly as my Dream stocks!

[Seoshin]

12 minutes ago, RedLion said:

I think that I naturally possess a value investor's bias to look for the cheapest investments (often value traps) and average on the way down. 

 

Over the last few years I've been experimenting with entirely avoiding these types of investments. Instead I'm focusing more on quality, and trying to find above average companies (high ROIC and safe balance sheets) priced at average valuations (not super cheap typically), then I've been holding or adding to my winners, cutting my losers rather than doubling down.

 

My returns have improved dramatically, but obviously we will need to see how this works out over a full cycle. 

 

For buying and holding stocks though, it's obvious that holding the outperformers is the only way to outperform over time. So you either index to get all the stocks and have a tiny holding in those big winners, or you have to guess, so cycling through losers and fishing in the realm of high ROIC seems like an interesting way (for me) to coffee can winning compounders while ditching the losers and getting tax losses along the way to hopefully reinvest in another possible winner. 

 

 

How was your journey from being a cheapskate in stocks to biting down on quality?

[Gregmal]

25 minutes ago, Seoshin said:

A contrarian approach I see. But how do you know you are right when majority is taking an opposing side of you? but thanks Greg for providing insight. I always like your replies on other posts and learn a lot from them.

Think it’s just getting a feel for stuff. For instance pretty early on I was able to see that almost every time I looked at an investment from purely a valuation standpoint my conclusion was proven wrong. So I stopped doing it and the end result improved drastically. Conclusion was easy. There’s was more to investing than just textbook taught valuation approach.

 

Overtime you just see certain behaviors are cyclical and conditioned so you can immediately thrown them in certain buckets as far as categorizing your inputs. For instance in 2021 it was pretty common to hear people lamenting “you just can’t short this market”, which pretty much is always a sign you wanna short the market lol. This kinda stuff just requires experience more so than high level analytics.