I read the book “Way of the Turtle” this week and while I am not a trader, there were some very fascinating takeaways for every investor.
Here is a portion of the best part of the book (for me):
Chapter Two: Taming the Turtle Mind:
The author, Curtis Faith talks about “cognitive biases” that effect investors decision making. While he is talking strictly about traders, it does pertain to all investors because in some way were are all traders, our time frames for our trades just differ greatly.
The biases are:
– Loss Aversion: The tendency for people to have a strong preference for avoiding losses over acquiring gains
– Sunk costs effect: The tendency to treat money that has already been committed or spent as more valuable than money that may be spent or acquired.
– Disposition effect: The tendency for people to lock in gains and ride losses
– Outcome bias: The tendency to judge a decision by its outcome rather than by the quality of the decision at the time it was made
– Recovery bias: The tendency to weigh recent data or experience more than earlier data or experience (“it is different this time”)
– Anchoring: The tendency to rely to heavily or “anchor” on easily available information
– Bandwagon: Believing something because many other believe the same thing.
– Believe in the law of small numbers: Drawing unjustified conclusions from too little information.
We all do these things and taken in concert, they can be the destruction of our portfolios. The importance of any one of the biases grow or diminishes based on the time frame you, as an investor have. If you have a two year time frame, the disposition effect varies. You can “ride a loss” for six or seven months and still come out ahead a year down the road. If you are an option trader, riding a loss for more than a month could ruin you.
It is hard to avoid these biases because they are ingrained in our nature. What one needs to do is remind themselves of them and then before investing ask your self if you are making the decision you are making because of any of the biases. If you are, then you may not be please with the results..
Chapter four takes the biases and uses them in conjunction with the trading strategy. A good chapter for both investors and traders as the concepts apply to both
All in all the books was worth the money spent if not only for the first half of it. The second half of the book goes into the “Turtle Trading System” which, as a non-trader, I have very little interest in. For those who are traders, it would be very valuable though.
