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April 9, 2014

Jonathan Tobin: Why Did Kerry Lie About Israeli Blame?

Samuel G. Freedman: A resolution 70 years later for a father's unsettling legacy of ashes from Dachau

Jessica Ivins: A resolution 70 years later for a father's unsettling legacy of ashes from Dachau

Kim Giles: Asking for help is not weakness

Kathy Kristof and Barbara Hoch Marcus: 7 Great Growth Israeli Stocks

Matthew Mientka: How Beans, Peas, And Chickpeas Cleanse Bad Cholesterol and Lowers Risk of Heart Disease

Sabrina Bachai: 5 At-Home Treatments For Headaches

The Kosher Gourmet by Daniel Neman Have yourself a matzo ball: The secrets bubby never told you and recipes she could have never imagined

April 8, 2014

Lori Nawyn: At Your Wit's End and Back: Finding Peace

Susan B. Garland and Rachel L. Sheedy: Strategies Married Couples Can Use to Boost Benefits

David Muhlbaum: Smart Tax Deductions Non-Itemizers Can Claim

Jill Weisenberger, M.S., R.D.N., C.D.E : Before You Lose Your Mental Edge

Dana Dovey: Coffee Drinkers Rejoice! Your Cup Of Joe Can Prevent Death From Liver Disease

Chris Weller: Electric 'Thinking Cap' Puts Your Brain Power Into High Gear

The Kosher Gourmet by Marlene Parrish A gift of hazelnuts keeps giving --- for a variety of nutty recipes: Entree, side, soup, dessert

April 4, 2014

Rabbi David Gutterman: The Word for Nothing Means Everything

Charles Krauthammer: Kerry's folly, Chapter 3

Amy Peterson: A life of love: How to build lasting relationships with your children

John Ericson: Older Women: Save Your Heart, Prevent Stroke Don't Drink Diet

John Ericson: Why 50 million Americans will still have spring allergies after taking meds

Cameron Huddleston: Best and Worst Buys of April 2014

Stacy Rapacon: Great Mutual Funds for Young Investors

Sarah Boesveld: Teacher keeps promise to mail thousands of former students letters written by their past selves

The Kosher Gourmet by Sharon Thompson Anyone can make a salad, you say. But can they make a great salad? (SECRETS, TESTED TECHNIQUES + 4 RECIPES, INCLUDING DRESSINGS)

April 2, 2014

Paul Greenberg: Death and joy in the spring

Dan Barry: Should South Carolina Jews be forced to maintain this chimney built by Germans serving the Nazis?

Mayra Bitsko: Save me! An alien took over my child's personality

Frank Clayton: Get happy: 20 scientifically proven happiness activities

Susan Scutti: It's Genetic! Obesity and the 'Carb Breakdown' Gene

Lecia Bushak: Why Hand Sanitizer May Actually Harm Your Health

Stacy Rapacon: Great Funds You Can Own for $500 or Less

Cameron Huddleston: 7 Ways to Save on Home Decor

The Kosher Gourmet by Steve Petusevsky Exploring ingredients as edible-stuffed containers (TWO RECIPES + TIPS & TECHINQUES)

Jewish World Review

How to effectively fight investors' greatest enemy

By Morgan Housel





When it comes to finance, Mae West wasn't right


JewishWorldReview.com | "I always thought the brain was the most wonderful organ in my body; and then one day it occurred to me, 'Wait a minute, who's telling me that?'" -- Emo Philips

Financial analytics firm DALBAR calculates the actual returns earned by investors compared with the S&P 500. Its latest reading is cringeworthy: The average stock investor earned an average annual return of 3.83 percent from 1990 to 2010, vs. 9.14 percent for the S&P 500.

That gap is more than can be explained by management fees or the underperformance delivered by the average mutual fund's poor skills. Something else is eroding investment returns.

And that something else is you.

You buy when you shouldn't. You sell when you shouldn't. You think you're capable of doing things you probably aren't. You are, in other words, overconfident in your skills as an investor.

You've probably heard of the Lake Wobegon effect with drivers -- the vast majority of drivers claim they have above-average driving skills. This even holds true for drivers surveyed in the hospital after being injured in car accidents that they caused.

The same overconfidence affects investors.

Markus Glaser of the Munich School of Management and Martin Weber of the University of Mannheim once asked a group of investors a simple question: How have you done at investing?

Just like drivers, more than half assumed they outperformed the average investor.

But the study found something even more disturbing.



The researchers asked investors to estimate their annual returns, then compared those estimates to the investors' actual returns by checking their brokerage statements. Investors were quite literally clueless about how their investments performed, overestimating their returns by more than 11 percentage points per year. The average investor painfully lags an index fund and thinks he's Warren Buffett, basically.

Part of this is understandable. Investing is hard. We spend untold hours talking with advisors, researching new ideas, watching CNBC and listening to pundits. Most investors have uncomfortably little to show for their effort, so they resort to convincing themselves otherwise. Jason Zweig writes in his book, "Your Money and Your Brain":

"By fibbing ourselves, we can give a needed boost to our self-esteem. After all, none of us is perfect, and daily life brings us into constant collision with our own incompetence and inadequacies. If we did not ignore most of that negative feedback -- and counteract it by creating what psychologists call 'positive illusions' -- our self-esteem would go through the floor."

We're also overconfident because hindsight bias fools us into thinking big events like the financial crisis were easy to predict, and thus will be easy to predict in the future. In his book, "Thinking, Fast and Slow," Daniel Kahneman writes:

"Our tendency to construct and believe coherent narratives of the past makes it difficult for us to accept the limits of our forecasting ability. The illusion that we understand the past fosters overconfidence in our ability to predict the future."

When you are overconfident, all sorts of dangerous behaviors arise that throw your investing results off track.


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For one, your predictions will likely become less accurate. Philip Tetlock, a psychologist at the University of Pennsylvania, studied expert predictions and found that those who were most confident in their forecasts actually had the worst track records. Confident forecasters tend to have broad, unwavering views about how the world works -- think of investors who were assured hyperinflation was right around the corner -- while those who make good predictions know that the world is more nuanced and are constantly updating their views.

As confidence rises, your perception of risk also diminishes. The best example of this is the hedge fund Long Term Capital Management, a team of investors stacked with Ph.D.s and Nobel laureates who became so confident in their ability to predict markets that they borrowed $250 for every $1 of their investors' money ... and went broke soon after. Financial advisor Carl Richards says, "risk is what's left over when you think you've thought of everything else." When you're overconfident, you're not thinking about much to begin with.

Overcoming overconfidence is easier said than done. But two things might help. One, become fiercely objective when measuring your success as an investor. Don't just assume you've done well because the Dow is at an all-time high and your portfolio has gone up, too. Measure exactly how you've done. Most investors will be surprised to see their returns versus a benchmark -- some pleasantly, others humbled off the ledge of overconfidence.

Two, talk about your investments with someone who is in a different emotional state than you are. The odds of making a good decision while in the heat of panic, euphoria or any other emotion tied to overconfidence are low. I run most of my financial decisions by fellow Fool Matt Koppenheffer. He thinks differently than I do and is more levelheaded in areas I tend to get emotional about. It's a tremendous benefit, and I encourage everyone to find a "finance buddy" with whom to do the same.

Every investor needs confidence. But Mae West wasn't right: Too much of a good thing isn't always wonderful.

(Morgan Housel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.)

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Morgan Housel, a columnist at The Motley Fool, is a two-time winner, Best in Business award, Society of American Business Editors and Writers and Best in Business 2012, Columbia Journalism Review.


Previously:


Four mistakes that make everyone a bad investor

Learning from the past, and the Next Big Tren

What newspapers were saying when you should have been buying

Why you never learn from your investment mistakes

The curse of success, and why most mutual funds fail miserably

If you know only five things about investing, make it these

Why spotting bubbles is so much harder than you think

When smart investors do stupid things

The deep downside of home ownership

The biggest retirement myth ever told

He's rich, smart and old: Listen to him

Admit it: No one has any idea what's going on

Gold collapse: The start of something big?

BAD NEWS: EVERYONE IS RIGHT!

Twitter: The carnival barker of investing

Warning: Don't waste your capital being fooled by profit prophets

25 important things to remember as an investor

New paradigm for both drivers and car companies

Biases that make you a bad investor

Nine financial rules you should never forget

Gaining from financial destruction

How to read financial news

Housing: Partying like it's 1925

A rebuttal to student loan horror stories

CONGRATULATIONS: We just saved half a trillion dollars

End this crazy tax: It will boost the economy

Medicare: A dangerously good deal

Economic future looks bright

The Biggest Threat to Your Portfolio (It's Not What You Think)

Bond Market Bull Run dead at 30



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