Even the most astute investors can fall prey to emotions and behavioral biases, and in a recent interview value guru Whitney Tilson talks about how to keep those emotions and biases in check.
“There is no sure-fire way to get rich quickly,” Tilson tells Steve Forbes. “In fact the pursuit of that usually leads to ruin. The best way I know to get rich long term is to invest prudently and conservatively and not try and get rich quick, but try and get rich slowly, basically. Especially in an environment like this where the stock market is hitting new highs every day, practically, it seems. It’s not a target-rich environment, so playing defense, being conservative and applying the basic principles of value investing.”
Tilson says that “there are dozens and dozens of mistakes, but in general the single greatest mistake investors make is projecting the immediate past indefinitely into the future. … And the reality is there are very powerful reversion to the mean trends. There’s always statistical noise, and so people tend to overweight whatever has happened recently, whatever is vivid. And they chase that, and that of course results in terrible outcomes where people pile into the hottest stocks. They pile into the hottest funds right at the peak, right before whatever fad or whatever wave that stock or fund has been riding cracks. And then of course it goes down a bunch, and then they leave right at the bottom.”
He also talks about why the three most dangerous words in investing are “I missed it”. As a value investor, Tilson says, he looks for stocks that are beaten-down. When he sees a stock that has been going up recently, his first response is thus to avoid it, thinking he missed the chance to buy — but that’s not rational, he says. “It shouldn’t matter whether the stock has been down 50% or up 100% in the past 12 months,” Tilson says. “You should wipe your mind clear of what happened in the past, and just simply analyze a stock, analyze a business at today’s price and decide whether it’s cheap. … The only thing that matters to me today is I can buy this stock today at this price, and is that price a substantial discount to intrinsic value?”