Question: What’s the worst thing that can happen to someone in the markets? Answer: Being right.
Have you ever met someone who bought Bitcoin (or Gamestop, call options on gold futures, the ARK Innovation ETF, etc.) and they made a bunch of money? After getting over your feelings of envy and jealously, did you take a moment to have a little pity for that person? No? Well, it’s likely that you should. Being right ain’t easy.
There is a huge difference between lucky and good. Sad to say, but most of the people who make a bunch of money speculating markets are merely lucky. Unfortunately, they believe themselves to be heir apparent to Warren Buffett (or whatever legendary money manager you can think of). This is known as overconfidence bias and it can have a pernicious effect on long-term investment performance.
Overconfidence can lead us down the road to ruin by blinding us to our flaws. Essentially, being overconfident when it comes to investing is akin to putting on blinders and walking out into traffic. A more appropriate course might be to employ a health dose of humility, and realize that the world is full of whip smart and hard working people who are competing everyday to find the very best available investment opportunities.
For younger investors, overconfidence can generate opportunities as well as a problems. A young, (over)confident investor may be willing to bet big on the “next big thing.” One example is digital assets. Many of the young people who were early adopters of this new asset class profited handsomely from it. And what if the “next big thing” blows up in your face? Well, at least a young person has the benefit of time to rebuild and recover from any major financial shellacking.
But at a certain point in our lives, overconfidence becomes deadly. Many successful retirees built careers or businesses that enabled them to grow their wealth for 30 – 40 years. They are experts in their crafts and have high levels of confidence in their talents and abilities. And sometimes that confidence bleeds over into their investment portfolio. Maybe they pick a few stocks or buy a healthcare ETF or choose a too-aggressive asset allocation.
But let’s remember the saying, “what got you here won’t get you there.” You could be the best surgeon in the world, but that doesn’t mean you are an expert in picking the best biotech stocks.
And most retirees have different goals than younger investors. By no longer working, a retiree needs their investment assets to provide rock-solid support for their spending needs for the rest of their lives. The target switches from growing wealth to preserving wealth.
So be sure to check in with yourself when it comes to the decision making around your investment portfolio. Stay humble and remember that rational decision making is hard, especially when trying to do it on your own. Consider seeking counsel from a financial advisor or even a trusted friend or family member. After all, even Warren Buffett has Charlie Munger (and likely a slew of other smart people who counsel him).
