Confidence Before the Fall

Last week, I ended on a note about confidence and that’s the theme I want to pick up again this week.

I often see people touting the virtues of self-confidence. Personal Coaches, self-help books and a whole set of others basically claim that the confident run the world.

All hail Chutzpah, god of confidence!

And yet, I wonder if he’s not leading some of us down a path of self-destruction. And so today, I’ll talk about the down-sides of confidence. I’ll talk about both Chutzpah and his brother Hubris.

But first, this video of a confident man:

Whiskey!? Well, except for asking for the wrong drink, this song has a lot of meat to it. It talks about a confident man who believes he knows what to do with his life and the cards he’s been dealt.

“You gotta know what to keep and what to throw away. Every hand is a winner and every hand is a loser.”

Yeah, I can relate to that. Investing is the same. Every single stock is both a winner and a loser. Some stocks are better shorted and others are better held long but EITHER technique will make you richer with the correct timing.

Some people invest with a window of minutes or hours, while for others it’s days and yet others believe a good investment is weeks, months or years long. Warren Buffet seems to have a window of a few decades, but he’s exceptional. Most of us want to have made our profits in less than 10 years, thank you very much.

The more confidence you have in stock picking, the shorter your window can be. I suppose that’s because you know (or think you know) you can wait to jump off your runaway wagon just as you see the cliff edge in front the lead horses.

That’s a bit too harrying for me, though and I’d rather be less confident in my picks and build in more safety with good long-term planning and timing the really big moves of 20%+ like we saw recently in NNVC.

Having less confidence in my own ability means I need really big obvious signs to make a move. I need signs like this one from the Huffington Post:

balcony

Perhaps that’s not a bad thing. According to this paper, over-confidence also leads to over-trading and to under-performance because of losses due to commissions.

Overly confident traders have the following problems:

  • They over-estimate their potential returns
  • They believe they will perform better than others
  • They believe they can trade with a high degree of precision
  • An interesting thing about confidence is that it’s surprisingly stable over time. It can take a devastatingly long string of losses to shake someone’s confidence and by that time, the damage has already been done and they’re broke. But never fear! They’ll be back after the next super-successful trade-of-the-century!

    Confidence is also NOT an indication of actual skill in stock-picking! You can have both serial-losers or serial-winners with the same high level of confidence.

    The difference of course is that the confident person can better sell his services than the one who admits that there is a chance he may be wrong and suffer terrible losses. So if someone in your family comes up to you and offers his stock-picking services on the grounds of confidence alone and with no track-record to prove his mettle, BEWARE! Strong words mean nothing in this business!

    This bears repeating: confidence IS NOT RELATED TO SUPERIOR SKILL!

    The research above also showed that confident investors often used magic and voo-doo as the basis of their decisions (naïve reinforcement learning and heuristics are the more polite terms).

    Not only do more confident people use magic, but because of their confidence, they feel they can safely ratchet up the risk-level of their portfolios! So, the more confident you are, the higher-risk assets you’re likely to hold.

    All this is to say that the more confident you are that you are the best investor ever, the likelier you are of having an Icarus moment. Mr Beerver is no exception to this rule!

    You’ll notice that Mr Beerver holds two small-cap biotech stocks (ISCO and NNVC) along with a mid-cap gold miner (AUY) and a REIT (DFGEX). Yep, that’s a risky portfolio right there. Gold and biotech are super-volatile and everyone still remembers the 2008-9 crash in real-estate markets. Perhaps Mr Beerver suffers from a touch of hubris?

    Nah…

    It’s nice then to have simple confidence backed up by facts. Mr Beerver’s recent bold action of buying up NNVC was backed up by Dr. Diwan who bought 50,000 shares at around 3.45$ on Valentine’s Day. THAT boosts our confidence tremendously! Even better: This purchase ran afoul of a SEC rule on insider trading and he’s had to give some 80,000$ of his recent stock gains in NNVC back directly to the company!

    So beware being overconfident, and always question what you do… but not to the point where you paralyze yourself! Finally, make sure that the facts back up your confidence and DON’T IGNORE data that runs contrary to your desires!

    Beware Chutzpah and Hubris!

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    About Beer Vestor

    I like beer. I like free beer better. With this blog, I want to show you the process I use to get free beer. Follow along if you like but remember that this is for ENTERTAINMENT ONLY! Nothing here is is to be taken seriously and if you lose money in your quest for free beer, it's 100% your own fault for following along with someone who is NOT AN INVESTMENT REGISTERED ANYTHING and who BUYS first and talks about it LATER!

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