Behavioral finance expert: This ‘powerful mental trick’ can make you a better investor
If you follow financial accounts on social media, your timeline is likely crowded with people touting the next big winning investment. “Buy our favorite stock or cryptocurrency now, before it goes to the moon,” they tell you.
As an investor, there’s an undeniable allure to finding the next Big Winner: the tiny tech stock that turns into the next Amazon or the coin that makes you an overnight millionaire. But what if instead of chasing the big win, you played the investing game with the goal of simply not losing?
Chances are, you’ll come out ahead, says behavioral finance expert Brian Portnoy, founder of Shaping Wealth and author of “The Geometry of Wealth.” “Adopting inverted thinking — facing problems from the opposite point of view — is such a powerful mental trick,” he says. “The world becomes a brighter and cleaner place once you get used to it.” Here’s what he means.
Win by avoiding big mistakes
Portnoy’s point of view on investing has been around, in one form or another, for decades. In a recent Twitter thread on the topic, he cited investment consultant Charley Ellis’ 1975 research paper “The Loser’s Game,” in which Ellis argued that winning at investing was akin to winning at tennis.
There are two ways to win with a racket, Ellis wrote. If you’re a pro, you hit high-speed, well-placed shots to defeat your opponent. But for amateur players, the vast majority of points are won and lost when an opposing player makes an error. Amateurs can triumph merely by keeping the ball in play and making fewer mistakes than their opponent.
In investing, avoiding big mistakes is the key to earning long-term returns. Remember: A drawdown of 50% requires a return of 100% to break even. What’s more, even most active mutual fund managers have trouble consistently outperforming their benchmark indexes. So, the question becomes: When it comes to picking winning investments, are you a pro or an amateur? Read More at https://www.cnbc.com/2021/06/23/this-powerful-mental-trick-can-make-you-a-better-investor-money-expert-and-author.html