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COMMENTARY LOG GERMINATIONS EDUCATIONAL ROOTS

See the forest AND the trees.

Irrationality

IRRATIONALITY OF POLITICS

There is a fantastic TED video (h/t: Marginal Revolution) discussing political irrationality that you should take the time to watch. It’s about 15 minutes.

This video is fascinating from a political viewpoint, but it is also highly relevant from an investing perspective.

How do you know if you might be irrational regarding a particular belief?

  1. You become angry when someone discusses their differing viewpoint (this shows personal bias that may be preventing you from even considering another point of view)
  2. You have strong opinions about a subject before acquiring relevant evidence (this is one of the most frequently made mistakes and also one of the more difficult to correct because it is typically accompanied by point 3
  3. Your opinion does not change as you gather said relevant and evidence contrary to your belief (dogmatism and fitting new information–even conflicting information–into your existing beliefs)
  4. You only seek sources of information that agree with your existing opinion
  5. You believe people who disagree with you are evil

We must always be mindful of our inherent biases or we risk making very large investment mistakes.

Take the 1960s. Investors disregarded valuation and built a list, deemed the nifty fifty, of stocks that were believed to be impervious to decline. You could buy the nifty fifty at any price. These stocks declined precipitously in the 1970s and significantly underperformed the market for the next decade.

Stocks are not always priced for the “long haul”, dividends may cushion a decline but it won’t be any less painful (the S&P 500 Dividend Aristocrats Index fell 52% from 2007 to 2009, compared to the S&P 500’s 57% decline), the world is not ending, and it’s not different this time.

Check out the video here (link):

This material contains the current opinions of the author but not necessarily those of Black Cypress and such opinions are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without proper reference. Past performance is not a guarantee and may not be a reliable indicator of future results. ©2014, Black Cypress Capital Management