Monday Market Update – August 30

Forefront’s Monday Market Update

How to pick stocks

I had a conversation with someone this weekend that centered around the value of engaging a CFP® for financial guidance if that CFP® doesn’t out perform the broad markets. Their feeling is that without beating the index, there is no value. He mentioned his own investing methodology has not outperformed the markets either, and he believes in indexing……. but can’t help himself trying to zig or zag. I know the title is how to pick stocks, but a better way to look at it is how to create a decision-making process?

Logical fallacies

Logical fallacies are errors in your reasoning that work to undermine a quality rational for making a decision. There are a lot of logical fallacies, but within my own methodology for making decisions, I am always careful to pay attention to a few that I know I am prone to. The thing about logical fallacies is they are inevitable, its human nature. You need to learn about them, identify them, and avoid them.

Appeal to authority

I used to think we had a drastic problem where humans have an over reliance on the perspective of an “expert” to help support their decision. All in all, listening to experts is great advice, the question you have to ask yourself is what makes them an expert?

Fantasy football season is coming up, and I love fantasy football, much like the tens of millions of people who play it each year. Every year during my draft I can tell the people who simply pulled up an ESPN article by one of their “fantasy gurus” and was just picking the best players available off of that list. They are always in the bottom of the standings. An experts support of your decision can be a feature of my why you are making that decision but not a pillar.

Jim Cramer is very smart, but his job is not to be an expert. It’s to get you to watch him on TV, so they can sell ad space around his segments and shows.

Sunk Cost Fallacy

I used to be extremely overweight, at my heaviest I was pushing a little over 305lbs. I made a change in my life and started to exercise and eat right. Through hard work, diet and exercise I was able to lose 120lbs and take back my life from morbidity. This was nearly 6 years ago, and I just threw out a box of pop tarts that I had from then.

Before I explain, the shelf life of pop tarts is absolutely astounding. I still had another 18 months before they expired when I finally threw them away.

Every time my wife and I went to throw out this box of pop tarts, I always told her to keep it because I didn’t want to waste the money. The sunk cost fallacy. I had already spent the money, and I wanted to get my value from it, with no regard to what it might cost me in the future, and if ultimately it could be a part of derailing my success. I held on to a box of pop tarts for 6 years without ever opening it, or even giving it a second thought unless I was thinking about getting rid of it. Holding onto something because you feel like you haven’t gotten value, or because you have lost value without giving the future a second thought is how people ended up holding failing stocks all the way to $0.

Rational

Bad decision makers have a loosely drawn-out map of their own knowledge and skill sets. Good decision makers are like cartographers. They have a distinguished map that has settled and surveyed areas of knowledge clearly drawn out and labeled, and unexplored territories just as clearly labeled and drawn out.

The definition of rational is “being devoid of all delusions save those of observation, experience, and reflection.” But being rational isn’t something we are able to be all the time, and all have varied degrees of rationality. I am hyper rational when it comes to my job, and planning for my clients. I am far less rational when my children have been playing tag inside for an hour, screaming and running, while I try and write the script for a podcast.

Sometimes, your rational calculations fail to account for the irrationality of other people. This is something I think about often, and I wish I could say I thought of it. Alas, the credit has to go to Mr. Spock from “Star Trek.”

The hardest part of building wealth is understanding yourself, and working around your own logical fallacies and rationality. You must recognize when you are wrong, seek out blind spots, and test your assumptions to change course if necessary. This doesn’t just go for you as an investor, but something your advisor should be practicing every single day, and sharing it with you!

So What?

So how does this impact all of you?

  • Does your advisor have a decision making methodology? Do you?
  • Being insightful into yourself makes you a better investor and helps build wealth.

Stock market calendar this week:

Wednesday September 1st:

ADP Employment Report @ 8:15AM

Thursday September 2nd:

Initial and continuing jobless claims @ 8:30AM

Friday September 3rd:

Nonfarm payrolls and Unemployment rate @ 8:30AM

Most anticipated earnings for this week:

Want to learn more about finding value and assessing risk? Listen to the newest episode of Understanding the Power of Money and find out how an advisor SHOULD be providing you value. HINT: it is not performance!
Listen to episode 14 of Understanding the Power of Money.