Overruling Yourself

February 11, 2020 - John Osbon (4 mins to read)

Last week the coronavirus overtook SARS in the number of deaths. The impeachment process was impugned by both sides. The Iowa voting was bungled. Party politics are more divisive and meaner than ever. In other words, we’re surrounded by a large field of negativity right now. Given this fact of life in 2020, how should investors respond to the barrage of bad news? Markets don’t seem to be reacting all that much. So, how does negativity affect asset values and what is worth paying attention to?

Seeing the bad in everything

We all know about negativity bias and its statistics. Even when bad and good things occur in roughly equal numbers, we still tend to see and talk about only the bad. There is a well-documented phenomenon in psychology saying that it takes four positive events to counter the impact from just one negative event. It’s so much easier to see how things will go wrong than to expect them to go right. That’s negativity bias and it is prevalent. Even when we know all about this mental bias, it can be difficult to overcome. That’s true of many mental biases.

Understand your failures

Negativity often affects markets on the macro scale, driving wide swaths of investors to sell or reduce allocations or to trigger defensive trading.

Negativity is even more persistent at the individual level where the stakes seem higher. How can we combat it?

Acknowledge that failure is a fact of life

Failure is never fun. This is true even when you are engaging in an act of trial and error. It might be that you invested a small sum into a high potential growth stock that is now trading at a significant loss from your original investment. It has virtually no impact on your total financial picture, but it can be disappointing nonetheless. It’s more productive to share your stories of challenge and failure with friends, families and advisors so that you can work together to grow and improve. Investing is one area in particular that many people will talk endlessly about their smart investments, and completely skip over the losers as if they never happened at all. This is a missed opportunity.

Act like an HRO (High Resilience Organization)

Examples of HROs are nuclear reactors and the airlines. These HROs know that there will be errors, omissions, mistakes and even the occasional bad actor. Expecting otherwise would be foolish. Rather than trying to prevent all errors, focus on ways to contain and cope with errors as they occur, minimizing their effects before they escalate. The best way to do this in investing is by diversifying. Sizing investments by risk, exposure, downside potential, total return potential, industry, and other ways, makes you more like an HRO and less like the casino.

Don’t fail to innovate

To truly innovate, you must test ideas without knowing in advance what the results will be. In our experience, investors in New England are particularly good at allowing themselves to innovate because they are naturally conservative spenders. Like Warren Buffett living in the same house for 30+ years, despite reaching stratospheric wealth, the majority of investors in New England allow their wealth to far outstretch their spending level. This allows them to take more chances… on tech stocks, on startups, on more equity vs less equity, etc. We routinely work with clients to establish guidelines around where they have room to innovate more or where they should pull back.

Overruling yourself

You can read more about the negativity effect in The Power of Bad. The power of bad is easy to recognize, but it can be difficult to cure. To do so, you may have to actively overrule yourself in decision making. Your biased brain may see one clear reason to get out of the market, and will actively ignore five clear reasons to stay invested. Taking a step back with full awareness of the negativity bias may allow you to overrule yourself when it matters most. Not easy, but important. Working with a team of advisors will also help overrule these biases.

Team up against negativity

Overruling yourself as an investor or as an advisor is difficult to do and it doesn’t come naturally to most people or organizations. It takes training, discipline and a lot of attention to detail. We are used to the process because our thinking is constantly tested by markets, clients and industry peers. Often the best way to counter negativity bias is through discussion with someone with a different perspective. We serve that role with our clients, helping to calmly determine when negative news is worthy of mild concern, immediate action or no response at all.

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