Richard Feynman once said “The first principle is that you must not fool yourself – and you are the easiest person to fool.” This is true in all walks of life- we think we’re better looking than we really are, we think we’re smarter, better drivers, better parents, and better children. Of all the places that self-deception exists, investing has to top the list.
In Jason Zweig’s Your Money & Your Brain, he shares the results of a survey conducted by Money magazine in late 1999.
More than 500 investors reported whether their stocks or stock funds had beaten the market (as measured by the Dow Jones Industrial Average) over the previous twelve months. All told, 131 investors, or 28%, said their portfolios had beaten the Dow. They were then asked to estimate their rate of return. Roughly a tenth reported that their portfolio had gone up by 12% or less, around a third claimed to have earned between 13% and 20%, another third or so said they had gained between 21% and 28%, and a quarter thought they had made at least 29%. Finally, 4% of the investors admitted they were sure they had beaten the market anyway! And yet, over those twelve months, the Dow was up 46.1%- vastly outperforming at least three-quarters of the investors who claimed they had beaten it.
A few years ago I decided I was ready to do some self-examination, so I downloaded all the trades I ever made. I wasn’t shocked to find that I didn’t beat the market, especially in light of all the central bank manipulation. I was surprised, however, to the degree with which I underperformed. I was also taken aback when I discovered how much I was trading. If somebody had asked me if I traded a lot, my answer probably would have been “no more than average.” And then the truth hit me in the face; from 2011-2014 I racked up close to $20,000 in commissions! I tried to beat the market and like most people, I failed. That was when I made the decision to start taking the advice I was giving people on a daily basis.
Harvard Business School’s Max Bazerman said “it’s easy to have illusions about the future if you don’t even have a grip on your own recent past.” Do yourself a favor and get a grip. Log into your account and examine your performance. It might not feel good and it might not even change your approach, but maybe it will dampen any illusions you have about the future.