Investing with the Trend: A Rules-based Approach to Money Management

Chapter 6The Enemy in the Mirror

Real Time versus History

In regard to financial crises, market meltdowns, and so on, when you actually live through it, it is always amplified to the point you think it is the absolute worst ever. After things have faded into history, it never seems as bad. I’ve been through a bunch of goofy markets, but 2008 seems close to the worst, even though I’m sure it isn’t. Being human has some real issues when it comes to the markets. There is an old aviation saying, “It is better to be on the ground wishing you were in the air than being in the air wishing you were on the ground.” Another crazy human trait is to wish the markets to be fair, but then search at often great expense for a way to get an edge and win. Opposing that is when you believe the market is unfair, yet you check your portfolio three times a day (see the section “Cognitive Dissonance” in this chapter).

Behavioral Investing

Heuristic refers to experience-based techniques for problem solving, learning, and discovery. Where an exhaustive search is impractical, heuristic methods are used to speed up the process of finding a satisfactory solution. Examples of this method include using a rule of thumb, an educated guess, an intuitive judgment, or common sense. Heuristics are strategies using readily accessible, though loosely applicable, information to control problem solving in human beings and machines. Heuristics is derived from the same Greek root word from which we derive eureka. ...