Hindsight is a wonderful tool

Hindsight is a wonderful tool, I knew. We can always say that as Monday morning quarterbacks, we would have made the right choice.

It’s easy to say, “I knew that, so I would have invested on each flip of the dice,” when looking back at the previous experiment. Why, then, didn’t everyone do that?

They, in my opinion, let their feelings take precedence over rational decision-making. It’s possible that after losing a number of trades in the past, they concluded that they had made an investment error and now fear losing another trade.

The advantage of looking back is that we can use logic to figure out what we should have done. We are able to steer clear of the feelings that get in the way. Emotion is the worst enemy of any good investor and one of the most common mistakes in investing. I suggest that every investor write down the reason they are choosing to invest in order to assist in overcoming this feeling. To remove the emotion that leads to investment mistakes, it is important to document the logic behind an investment decision. The goal, in my opinion, is to get to the point where you can say, “I know that,” as opposed to “I knew that.” You are utilizing the logic that you typically employ in hindsight to your advantage by removing emotion from your decision.

Self-Congratulation Every time we make a successful investment, we congratulate ourselves on our decision-making abilities. However, when an investment fails, we frequently attribute it to bad luck. Psychologists say that this is a natural mechanism that we humans have. It is a bad trait for investors to have because it causes them to make more mistakes when investing.

I have discovered that I must document each of my trades, particularly the reason I am making the decision, in order to combat this unfortunate human trait. The outcome allows me to evaluate my choices. Did I make the right decision? I can at least claim skill if that’s the case; luck could still be to blame. Was my assertion correct for a bogus reason? If that’s the case, I’ll keep the outcome because it makes me money, but I shouldn’t fool myself into thinking I was really doing it right. I must determine what I missed.

Was my reasoning incorrect? I made a bad investment decision; do I need to learn from it, or was I right all along? After all, bad things do happen. I can only hope to learn from my investment mistakes by analyzing my decisions and the reasons behind them. This is a crucial step toward developing real investment expertise.

Luck Changes into Knowledge The market is made up of a series of actions that have a cause and effect but are not always obvious. Some very successful individuals have displayed some interesting behaviors as a result of this cause and effect. Some baseball pitchers, for instance, are known to avoid crossing the white chalk line while playing. You’ve probably heard of a lot of “superstitions” that people believe are true to help them succeed.