You gotta listen to what Tilson says…

Tilson … who?

Whitney Tilson, an investment guru from the United States. His company manages three hedge funds and two mutual funds.

Recently, I chanced upon an old article of his in the Internet. I felt it was quite interesting; it was such a good read.

In Tilson’s article, he wrote:

“Numerous studies have shown that human beings are extraordinarily irrational about money. There are many explanations why, but the one I tend to give the most weight to is that humans just aren’t “wired” properly. After all, homo sapiens have existed for approximately two million years, and those that survived tended to be the ones that evidenced herding behavior and fled at the first signs of danger — characteristics that do not lend themselves well to successful investing. In contrast, modern finance theory and capital markets have existed for only 40 years or so. Placing human history on a 24-hour scale, that’s less than two seconds. What have you learned in the past two seconds?”

A crazy comparison but nevertheless, true. And then, he went on to list some of the common mistakes that investors make.

Foremost among them is herd behaviour. How often have we made decisions based on the rest of the people around us? We always desire to fit into the crowd.

Then, there is the fear of change, the preference to remain with the status quo no matter how good or bad the changes are around us. Related to this fear of change is the fear of making a wrong decision. People fear that it will make them look stupid in others’ eyes.
But for those who do want to make decisions, they often do not act because there are too many attractive options to choose from. So they hesitate and there is no change. Vicious circle, isn’t it?

Anyway, Tilson also observed these mistakes in investors:

• Using mental accounting to treat some money (such as gambling winnings or an unexpected bonus) differently than other money;
• Excessive aversion to loss;
• Ignoring important data points and focusing excessively on less important ones;
• “Anchoring” on irrelevant data;
• Overestimating the likelihood of certain events based on very memorable data or experiences;
• After finding out whether or not an event occurred, overestimating the degree to which they would have predicted the correct outcome;
• Allowing an overabundance of short-term information to cloud long-term judgments;
• Drawing conclusions from a limited sample size;
• Reluctance to admit mistakes;
• Believing that their investment success is due to their wisdom rather than a rising market;
• Failing to accurately assess their investment time horizon;
• A tendency to seek only information that confirms their opinions or decisions;
• Failing to recognize the large cumulative impact of small amounts over time;
• Forgetting the powerful tendency of regression to the mean;
• Confusing familiarity with knowledge;
• Overconfidence

You can read Tilson’s full article here. Believe me, it’s interesting!

Enjoy….