Investing Against the Odds, and the Facts
“What is a fact, anyway? Merriam-Webster defines it as ‘a true piece of information,’ and we tend to think of facts as things we can prove through direct observation or scientific experimentation.
For instance, paying 22 percent interest on your credit card while having money in a savings account earning only 1 percent is a bad idea. The numbers make that a fact.
Another fact, proved by the weighty evidence of history, is that it’s very unlikely you can outperform a simple stock market average or index over a long period of time by trying to pick the next ‘hot’ stock or mutual fund. It’s not impossible, but the facts show it’s highly improbable.
The interesting thing about facts is they exist whether we accept them or not. They don’t change simply because we don’t believe them. But once a fact is established as true, we still have a choice. Do we dismiss it? Believing a fact can have all sorts of implications, but perhaps the most important is whether it leads to action.
Let’s go back to the idea of beating the market. I know of no study that contradicts the truth of the high improbability of doing so.
Assume we know this fact and do believe it’s very unlikely we’ll beat the market. Why, then, do so many of us act contrary to what we know and believe? Do we keep betting on individual stocks because we genuinely think we’re the exception? Or do we keep jumping from stock to stock because we like the way it makes us feel?
…vUnderstanding that we’re doing something because it feels fun, for example, may be a real eye-opener; your actions don’t align with what you know and believe because you enjoy the excitement of tracking stocks and trying to predict what will happen next in the market.
It seems like a small thing, but understanding how you reached this point — acting contrary to what you know is a fact — can help you avoid a similar disconnect in the future.”