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3 Things 7-29-24

Thing One



The following is piece from our "archives" about investing discipline



Be Aware Of Your Biases


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"It’s funny what a bull market can do to our brains. . . .



Money earned passively in the market, rather than from toiling at work, can feel easier to gamble with. It is a dangerous bias psychologists call the “house-money effect.”. . .



Everyone wants to assume that they can think rationally. But with bear markets now a fading memory . . . now is an important time to understand the common behavioral biases that cause investors to make regrettable decisions during bull markets.



Here are five others.



The backfire effect. This is a powerful bias that causes us to double down on our beliefs when exposed to opposing viewpoints.



“We think this response occurs because people respond defensively to being told that their side is wrong about a controversial factual issue,” says Brendan Nyhan, an assistant professor of government at Dartmouth College, who has studied the backfire effect in politics.



“In the process of defending that view, they can end up convincing themselves to believe it even more than they otherwise would have if they had not been challenged,” he says.



The same flaw can run wild in investing debates.



If you are convinced that we are in a lasting bull market, how do you feel when you hear someone say that stock valuations are historically high, or that we are overdue for a correction?



If you find yourself so critical of opposing views that you become even more convinced the bull market will last, watch out. Once your priorities shift from determining the truth to blindly defending your original views, you have lost the ability to think rationally.



Confirmation bias. This flaw causes us to seek out only information that confirms what we already believe.



Access to financial opinions has exploded in recent years . . . . But it can be dangerous, because no matter what you believe—and no matter how wrong those beliefs may be—you can likely find dozens of investors who agree with you. Having other people confirm your views may cause you to become more convinced that those views are correct.



Charles Darwin had a knack for obsessing over information that disproved his own theories. Investors should try to do the same.



Anchoring bias. This phenomenon causes us to cling to an irrelevant piece of information when estimating how much something is worth.



Your opinion on how much a stock is worth may be anchored to how much you paid for it. If you paid $100 for a share of Apple stock, you are probably more likely to think shares are worth more than $100 than another investor who paid $80 for the stock.



But the market doesn’t know how much either you of you paid for the shares. And it doesn’t care what either of you think is a fair price. Markets will do as they please, regardless of what price you are fixated on.



Recency bias. This one is simple: It is another term for the tendency to use the recent past as a guide to the future.



People like patterns. If stocks have just gone up, the natural tendency is to assume they will keeping going up—at least until they go down, and then we assume they will keep going down....



Markets move in cycles, but people forecast in straight lines. That is recency bias, and it is particularly dangerous after a long bull market.



Blind-spot bias. This—the most dangerous investing bias—is a flaw that causes us to think the biases described above affect other people, but not ourselves."


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And the conclusion (also from the archives) is:



"...Individual investing has to be a long term commitment in order to be successful.



Part of successful individual investing includes the ability to understand the role that our emotions and biases tend to play when stock prices decline.



Since we humans tend to react more quickly to negative events than to positive occurrences, we are much more likely to do the exact wrong things at market bottoms and tops. We too often panic and sell when the market is falling rapidly, and then turn right around and buy when stocks are rising.



That's the losing buy high and sell low 'model,' and it's harmful to one's long term financial health and well being.



So becoming better acquainted with our emotional side is perhaps the best thing we need to know about individual investing..."




Thing Two



Which Is Better, Tax Cuts or Tax Hikes?



The answer to that question always seems obvious to many of us, but consider this brief excerpt from a recent Wall Street Journal Article about US Treasury Secretary Janet Yellen’s efforts to enact a global minimum tax which, according to the article (and the dictates of logic), would make it easier for governments around the world to raise their tax rates:



“…The 2017 tax cut lowered America’s federal corporate tax rate from 35%, the OECD’s highest rate, to 21% … Since corporations are nothing but legal structures, no one has ever seriously disputed the notion that corporations don’t pay taxes. If a corporation can’t pass a tax on to customers, the burden will fall on investors and workers. As expected, after the 2017 tax cuts went into effect, real wages grew 43% more in 2018 and 93% more in 2019 than the 2011-17 average increase.



Pension and mutual funds, charitable organizations and insurance companies holding equities to fund death and annuity benefits—which own some 72% of all American equities—saw their rate of return increase 22% relative to the average 2011-17 returns in the two years following the tax cuts before the pandemic. After the 2016 elections, when it became clear a tax cut was coming, until the beginning of the pandemic, equity values rose twice as fast annually as they had risen during the previous seven years. A corporate-tax increase would be expected to produce the opposite results…”



There you have it. Cutting corporate taxes increases real wages and wealth for individuals and raising them does the opposite. The same holds for individual taxes. Raising them (even if it will only be for people making more than $400,000, which it won’t because the math doesn’t work) will not make America and Americans wealthier, it will only give politicians more money to spend in connection with their own re-election efforts.



Thing Three



Just A Thought



"The advancement and diffusion of knowledge is the only guardian of true liberty." - James Madison

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