You are your own worst enemy.
Those are the six most important words in investing. Shady financial advisors and incompetent CEOs don’t harm your returns a fraction of the amount your own behavior does.
Here are 15 cognitive biases that cause people to do dumb things with their money: 15 Biases That Make You Do Dumb Things With Your Money | Morgan Housel | Motley Fool. Hat tip to Barry Ritholz.
My favorite:
14. Restraint bias
Overestimating your ability to control impulses. Studies show smokers in the process of quitting overestimate their ability to say no to a cigarette when tempted. Investors do the same when thinking about the temptation to do something stupid during market bubbles and busts. Most investors I know consider themselves contrarians who want to buy when there’s blood in the streets. But when the blood arrives, they panic just like everyone else.
If you have a trading plan it tells you when to buy and when not to, and when to tighten stops on your holdings – most people don’t have a plan so emotions mess them up – as they say
“Fail to plan and you plan to fail”