The other day, I was chatting with a younger friend who’s in the final stages of completing a PhD thesis.
For any PhD student, it’s a stressful time; I remember it well. Proof-reading hundreds of pages, again and again. Searching for typos, grammatical errors, inconsistencies, and anything on which you might be challenged by the panel of external examiners in the verbal examination that follows, when the thesis is submitted.
Change the font, I advised. Use a different typeface, and in a larger size. The line breaks will occur at different points, and you’ll be much more likely to read what you actually wrote, and not what you think that you wrote.
A few days later, I had a status report. Her ‘to do’ list of outstanding corrections had ballooned in size: changing the font was like gaining a whole new perspective on a text that she thought she knew extremely well.
Different eyes
A fresh perspective is often useful, in many aspects of life. All of us benefit from talking through difficult decisions with friends and family, or from seeking out experts when we’re not sure that we fully understand a situation.
So too with investing.
Personally, I very much value the opinions that I read on an investing discussion forum that I frequent, especially when the posters in question are people whose opinions I value, or when it is evident that their knowledge of a particular area is superior to mine.
Indeed, as national newspapers and media organisations have pared back budgets in recent years, the expertise freely available online can be hugely more informative than what you’ll often find in the City and finance pages of many newspapers.
Confirmation bias
But what is it about a fresh investment perspective that is so valuable, though?
Hard news, for one thing. Especially when accompanied by some sharp analysis that goes beyond the basic facts.
But the opinion pieces — or columns — are also of huge value. Because — even more so than with the news stories — they help us overcome what psychologists and behavioural scientists term ‘confirmation bias’.
And confirmation bias is something that investors very much want to avoid, especially given that most of us are instinctively very prone to it.
What exactly is confirmation bias? Simply put, it involves seeking out, valuing, and being more comfortable with views and opinions that mesh with your own — newspapers and media outlets that reflect your own worldview, people that share your own world view, political parties that share your own worldview.
Which in investing can be very dangerous indeed.
Fewer turkeys; more nuggets
Why is confirmation bias so dangerous?
Because, as investors, all of us make judgements — judgements as to the prospective value of a given investment, judgements as to the attractiveness or otherwise of a particular business’s business case, and judgements regarding the appeal or otherwise of a given sector, industry, or asset class.
And — because we’re human — we’re basing those judgements on imperfect information, and incomplete information.
So if we rely only on our own judgements — reinforced by like-minded opinion — we’re more likely to either over-estimate the likely return from a given investment, or alternatively be deterred from making that investment, as we under-estimate the likely return.
Put another way, we might buy investing turkeys, while passing up on gold nuggets.
Seeking views from a fresh perspective helps us to improve the quality of our information, helps us to make better judgements, and consequently reduce the effect of confirmation bias on our judgements.
In other words, we’re more likely to pass by a few of those investing turkeys, and spot a few of those nuggets.
It’s out there — so read it
So don’t feel guilty about spending time on internet discussion forums. Read widely. Check out a couple of low-cost subscriptions to media that you might not otherwise read. Join – or form – an investment club. Chat things through with investment-minded friends. Subscribe to fund managers’ free research, or to the investment ideas and research put out by the major investment platforms.
It’s not ‘wasting time’. It’s avoiding confirmation bias — and your future self should thank you for it.
