Roaming Returns

023 - More Cognitive Biases That Lead To Investing Mistakes (Part 2)

December 12, 2023 Tim & Carmela Episode 23
Roaming Returns
023 - More Cognitive Biases That Lead To Investing Mistakes (Part 2)
Show Notes Transcript

Human biases are an innate part of us, so we have to learn to navigate them. Otherwise, they'll throw monkey wrenches into your life and definitely your investing and finances. 

Awareness is the key to being able to do this. And once you're able to slow down and see what's going on, you'll be able to make much better investing decisions and understand why other people are acting like they are. 

In this episode we discuss the remaining biases relative to investing and finance 

  • Regret aversion
  • Loss aversion
  • The endowment effect
  • Anchoring
  • Hyperbolic discounting


And we'll cover some mental shortcuts that you may be using to save yourself time or effort, but they might be leading you astray.  

If you missed part 1 go back and listen to episode 22. 

Drop your comments or questions for this episode on one of our posts.  


 If you're looking for a more detailed summary of this episode, click here.


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Ticker metrics change as markets and companies change, so always do your own research. The content in this podcast is based on personal experience and is for educational purposes, not financial advice. See full disclaimer here.

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Welcome to Roaming Returns, a podcast about generating a passive income through investing so that you don't have to wait till retirement to live your passions.

Today's episode is going to be part two of the behavioral finance or the biases when it comes to investing. If you could make it to the halfway point of this episode, we go into some things that are more practical to like daily life that you can observe and translate them into a better way of investing or less emotional way of investing. And then if you tuned in to the end, we go into what we're going to talk about in the next three episodes which is going to be super interesting. So power through, you got this. Alright, we are back with part two of the the
wonderful world of psychology. I know everyone's been holding their breath since last week you guys can all exhale now. biases, biases. Last week we covered confirmation, overconfidence and herd mentality, which are the three the three big ones as they say down so that begins
once we're talking about gravy and deep
fried stuff, or is that a West thing?
I think begins is in her preference. Something
different I know we were in Texas, they said the biggest was a Chucky Cheese. Buckeyes Bucky, Lucky's biggest buches was the biggest ski Jackie's the biggest gas station or something like that and it was horrible. We tried to camp there and they came out and said You guys can't camp here even though I watched like six YouTube videos of people camping there so Chuck ease is horrible.
Bucky. I'm telling you, the creepy clown are
calling the Cherokees from now on because they're such a ze we're gonna go over some of the versions and then some other fun stuff. There's like five or six we're gonna go over I don't have like an N left off the top of my head. The first one is regret aversion, and that's kind of like what sounds like
FOMO I feel like that's counterparty to FOMO Fear Of Missing Out and regret aversion. No
regrets when you like when you make a mistake and you refuse to like, it's very difficult and hard for you to admit that you made a mistake or made a bad decision like you know, dynasty toys for example.
We could put them admitted that we screwed up on that one. That one's the one we're in denial or I'm in denial
and what what happens as you have the psychology, the psychological like nagging in your head like oh, the last time I invested in like a private company like for the Fourth Dynasty, for example, the last time I invested in a private company they swindled me out of 1000s of dollars. So then we have severe indecision the next time opportunity opportunity prevented presented itself like that. So to correlate that with what we're doing so say you invested in IEP as your as your first dividend stock and it shot down like 60% this year. So the next time you go to like, invest in a dividend stock, you're like, I don't know the last one really burned
burn through in my wallet made me panic and sell took some huge losses. And then if you put money in that you couldn't afford to lose. And so that's
one way there's there's two ways that regret aversion works. The first is you are indecisive about an opportunity because you've been burned in the past. And the second is you hold on to a position that you should have sought like IEP
hoping it'll go back.
There's not hoping it just like it's because you don't you don't want to have a loss because then you have to admit to yourself you made a mistake. And people apparently have a real problem with that. Like I'm like her dad when when I first started working for her dad like he's so used to employees that were just like they would like to hide their behind or hide their mistakes or pass it upon them off everyone else and he's like, did you do this on my Yeah, my bad. I've never had a problem and many mistakes I know and
he was just like so shell shocked and then he was like getting ready to yell like all ready to up and then Tim says that and he just like I don't I don't know how to respond to that I was ready to tell him. I know you did it.
But the biggest the biggest part of regret aversion is for
the extrovert is the biggest part can't just stop the microphone.
Just said that's enough though. So we're done for the night cats that were good. The biggest part would you say for the extroverts for the for the extroverts out there listening it doesn't affect me but the extra it's because like whenever they invest, they they have to like communicate to their cohorts that are extroverted, like I invested in the stock and I made so much money. The part that they have a problem with it relates to return to regret aversion is whenever they say oh I invested in this and it shocked and they like really have a problem with that and they struggle with it and it messes with their minds it's hilarious. I'm
not sure I follow that. You mean because they can't keep their mouth shut on something they invested in and then it goes back to
like the extroverts are always say that I invested in this winter I got I got like 200% gain, like all the publications you get where they're bragging. About like I made like this I made that made this made that those are all extroverted, like word vomits ego boost there's so like even like the hard part like the one that whenever you have regret aversion as one of your biases, you have a real problem as an extrovert because you always want to talk about how good you are and then you can't because you have that so like they just like short circuit their brain. Okay. So that is a regret. I mean, my philosophy about life investing pretty much anything is you have regrets you're doing something wrong. You should never like have regrets ever, ever about anything.
Oh, see, I think regrets. I think regrets have serve a purpose. If you don't have regrets. That means you didn't really have anything to potentially learn from that situation. But if the regret keeps hanging on and lingering, that means you didn't resolve
that's not a direct that's just you made a bad decision. You've learned from it. Regret is where it literally hangs
out. I've had I've had ones that are hanging, hanging hanging. It wasn't until I finally like looked at things square in the face and was like, Oh, this is the piece I was missing or why this was hanging on. Usually there's a lesson in it. Aren't you special? No, not necessarily.
Good. The second one we're going to discuss is closely tied to regret aversion, its loss aversion. And that is
the one similar to FOMO.
No loss aversion like it's a psychological thing for whatever reason. They have numerous studies that provide a documentation for this I didn't list them but you can look it up if you want to just type in loss aversion studies. It's the psychological tendency where when you lose money, it like affects you two times, three times four times harder than whenever you make money. I
think that's part of human nature. They've proven with monkeys, that if you give them two bananas, and you take a banana away, and they're left with one banana, and you give a different group of monkeys, just one banana, the ones that had the two and had the one taken away are like way more pissy than the ones who are basically like the there's something about humans and the value they go with is $100
loss. And then they like I guess they had a tracker that would track of like
how the $100 loss is way more painful than $100 game. Yeah,
it's crazy. Like it's crazy. It's the same. So then what they did is once they once they found out like how the psyche works, they would start like paying attention to know how advertisers did thing and it's fascinating, like, people bitch about advertising all the time, but like the psychology behind it is so fascinating is like that is probably the most psychological dependent, career, whatever you want to call it out there like they did they started like so I started paying attention to advertising and they started phrasing things and worried like, rather than a $5 discount, would you would you rather have a $5 discount, or would you rather avoid a $5 surcharge and
were more motivated by the surcharge which I mean it makes sense because again, there's something about that loss factor having things taken away from us.
And this like this few take this back to what we just said was a regret aversion like the psychological opponent where they hold on to stock so this will be the same thing here was that people will hold on to stocks that they should sell or they should put if you believe in the stock losses, I don't but you should put a stop loss and that way you can just take the psychology out of it completely if you'd like literally buy something for $20 You put a 25% stop loss on it. And you just leave it like that ever hits that it sells and then you can just take the psychology completely out of it. That's why they do stop losses once I started researching this, I understood why they do them. Now.
Again, the concept for stop loss is good, but the practical application with the way that makers and takers and the matchmakers work. It doesn't work out that way with the
other part like so, you have the stop losses but then you have the other component where the people would sell to avoid the loss when they shouldn't set let's just wait for a correction and collect their dividends.
Well, that's what's nice about dividends, dividends should
basically what we've been doing and pretty much most of 2022 and like a good chunk of 2023 it's like just collecting dividends because it's been going down or sideways. It's been a little up but for the most part it's just been collecting and when we do the end of the year podcasts you'll see like it's been it's been a really interesting lucrative yet. Sideways year. Yeah,
from a value perspective doesn't look like we made deck. But if you really start looking at the actual dividend payouts
of dividend payouts, like our income per month went up a lot and our share counts are just ridiculous. So
our value of our account was basically breakeven as of right now, we'll see what it does at the end of the year, but I did the calculations for dividend payouts per month and they've gone up 39.7% 39.7%. And
then a way that people will come combat these two versions we just mentioned the regret and the losses they'll actually have an Uber conservative portfolio that doesn't make them anything. They'll literally just invest in CDs, or stuff like that. So like they're actually they might be gaining money now but prior to 2022 they were losing money in these ridiculously conservative portfolios because inflation was actually outpacing the CDs. Well
I think we are going to do an episode about that that like ultra conservative portfolios look like they're still profiting but there's other factors kind of in the shadows that are actually creating losses you're not aware of, like inflation is a big one. So
the like a side shoot of the two versions. We've just mentioned is something called the endowment effect. endowment, endowment. endowment.
I find this one fascinating.
This is the Phenom on the phenomenon where people will actually attach more value to a tangible things like homes or tweet handlers or gold or silver than because they own them then like so. You know, but what they're saying is tangible you own $100,000 house that $100,000 house is more expensive in your mind than $100,000 in the bank or something like that. It's crazy. Valuable. It's crazy. That sense I just said it's more like it
I think it coincides with the fact that we're such a materialistic society that like physical objects hold more gravity because you can smell taste touch like he'll, well
they even did studies and I forget I think it was in Europe. There's one of the British publications, I forget, but they literally just like you bought $10,000 and not say Apple stock like two minutes ago. And then a better like a better situation would present itself where if you put 10,000 in it, you'd make more people wouldn't do because they already own the Apple stock two minutes ago.
It's crazy show that doesn't take into consideration that whole loss factor because you have to liquidate something you already own and like
what was it? It's like an offshoot of the Yeah. It's like the storage
unit. Like compulsion people have they can't get rid of stuff. They just have to keep accumulating more than when
it was like real like it really illustrates like how prominent is in people the fact that they bought something two minutes ago and they couldn't sell it for a better deal that would pay them more two minutes later because they already own the stock from two minutes ago. That's insane. Well,
that could also be tied to the regret thing to where then they have to go through some thought process and if they put a lot of time and effort into the first one like that could maybe potentially factor in that they made a bad decision so they feel bad so they don't actually want to even entertain the new one. Because
what they said in the not too abstract but like their conclusions of the studies is it's not a human's maybe kind of ties into that humans for whatever reason when we sell something that feels like a loss. So even if we bought a house for 100,000 and we sell it for 100,000 We feel like we're losing money because we're actually losing an asset. And for whatever reason, it really just messes with a lot of people's minds that I have that sometimes it's 100,000 Either way, let it be that it's a house or it's a car, it doesn't
get attached to the cars doesn't matter. It's the memories and a lot of those things for you. Yeah. For a lot of people though. It's the memory like there's more weight to it because it's actually got like energetic Improve
Your memories are dependent on things and you might be doing the wrong shit.
Or you're just like more submissive to man Cornwallis and then you're more cerebrally advanced than the rest of us.
So we come into towns near you and 2020 Oh my gosh, look for the big burgundy fucking van just rolling through a 10 miles an hour or maybe 20 miles an hour lower than it should be driving. That's us. We drive so we're in New Mexico the highlight to add Texas but New Mexico was really prevalent because we were on a main road interstate 40. And the speed that it was, I think 80 miles an hour. In Texas. It was 18 we were doing 55 But the one that come in in New Mexico was like a highway commercial vehicle, traffic road. And the speed limit was whatever and I was doing like 35 Because semis just destroy the road. And these trucks are like blown by me honking their horns shit and I was like, What dude, it's my house. I'm not in a hurry. I'm sorry that you are. Yeah,
it's unfortunate that there aren't more like secondary roads. I prefer those anyway. are buddies in a hurry to go nowhere
because the next thing we're going to discuss is something that I don't really think pertains to stocks as much as the people in these studies do it pertains to like everyday life and it's called it's called anchoring. Anchoring is where you make decisions based on values that are known to you. Like when you buy, say, a house for 100,000 That's your anchor point. You won't take anything less than 100,000 Even if it's a really crappy housing, like housing market or like really crappy environment or you really need money because for whatever reason, you won't take less than 100,000 because you put 100,000 into it, you have an anchor point that you both deviate from, so that'll
definitely come into play with stock purchasing and selling, mainly selling. So if you buy a stock and I think this is another reason people won't let go of losses or will just take a loss is because they want to get back to that breakeven. At the very least they want to get back to that anchor point because it's what they put in it's determinism
and investing what it does is it compounds problems because they're holding on to like say for example, we bought MPW for I want to say 1062 or something like that. So if we if we actually applied anchoring to our investment portfolio, we would never be able to actually let go of it because the odds of that getting back up to 1062 are slim and other cats fo so like so they actually incurred more losses because they're unwilling to navigate, just a arbitrary point,
because that's what we were just talking about with the whole if you just bought What did you say shares of Apple and then two minutes later some other better opportunity came along. Would you sell? Well the same thing happens with a loss if you can cut a loss that may or may not potentially probably won't go back up to your breakeven level. If you see another investing opportunity that you can take the amount of money that is left in that account and actually grow it at a faster rate than holding an open holding and hoping is not a strategy. And that's what we do all the time will cut losses when there is a better opportunity than all the time all the time because it makes so much more sense. Yes, it's painful in the beginning, but you really do have to be take yourself outside of that emotional pain, emotional pain. I'm saying most people you don't you're like a robot, okay? You don't have this problem.
Because like if it's something that's paying you say 20% But you're losing 5% a month. Doesn't matter. That doesn't
make sense. Does it make sense to stay it makes sense to jump into something where you will see anchoring
a lot and this is again is the marketing ploy. Like I said marketing marketing is fascinating. is in sales. Like say you go to buy a new car they actually will have the salespeople at the dealership have an anchor point that they start like they'll say, Well, this new car costs $42,000 Even though it doesn't, so whenever you talk them down to like 38,000 You think you're getting the deal even though they actually so this
actually there's an example in one of the online business things I was taking it's a it's a great example it was the one iPhone it might have been the first iPhone I don't remember, but they started the entire like teleconference or webinar with a price saying this phone is worth $1,500 And then they were talking about all the different features and all that other stuff. So they put that anchor point in the back of your mind. And as they're talking about all those features and all that thing over that amount of time. They're slowly in graining that you're considering that phone worth that amount. And then they're like, we're not going to charge you that we're going to charge you half. You think it's such a deal at that point because you've already anchored that higher price point in that you're more likely to buy it. I
see. And I see a lot of the publications that I like the authors of the publications that I subscribe to they try that but they do it incorrectly, they'll like they'll babble incessantly for like four pages and they'll say Well, normally this would cost $2,000 But because I'm such a great guy I'm going to sell it to you for 1200 That's that. You don't have any like psychological attachment to that $2,000 price. It doesn't matter. It's like oh, what do you do? 1200 still a lot for a couple articles.
You have to be really hard with something you actually want and then they have to like oversell it and then cut it in half to like get you chomping at the bit to buy really good marketers and advertisers we'll be able to do this really well. But I think that happens too. Like if you have a lot of things you want to get rid of but you're unwilling to let go of stuff for less than the price of what you bought it for. I think that's another reason people can't let go of like the extra stuff they have laying around. It's because they want to get back to $1,500 they spent on that couch when it's only probably worth now $100 Because couches flip so quick. Same thing with electronics. If you keep holding on to that you're holding space for something, then potentially losing out on more enjoyment of something else, or better value or
they they do it incorrectly like if you if you don't have a psychological attachment to the price it doesn't matter in sales what they do so just almost flawlessly and I'll look at some of this. Some of the advertising the sales I've seen is they'll do that were like oh like like why the one that I always think of is a freaking car dealership because they know the car cost 30,000 They put it 42 So that when you talk them down to like 38 or 36 You think you're getting a steal, and in fact they're ripping you off well
and the whole time too after they tell you that MSRP value. They're like talking about all the bells and whistles. It's got all the people that are interested all this other stuff like they're using multiple psychological tactics on you. And then if you talk them down a little bit, you feel really good and they're still making a problem with
them. And the reason why I bring it up the reason that I keep bringing up like things that aren't invested investment related is so that you can start to see the little nuances of all that's that's a loss aversion. Like we're Oh, that's a
it's still the same psychological thing. It might just be applied in different situations, but they all apply the same so people
that are listening can see that oh, okay, so that's whenever I'm in that frame of mind that actually is anchoring. So the next time they see it, they're like okay, all right. That's
the thing if you're aware of it and your normal day in life, you can tell you'll notice when it's starting to happen to you when you're starting to invest so like find these things in your everyday life happening and your psychological mind frame and you'll be able to catch them and apply them and see those red flags when you're actually going to do the investing. Now
the next one I want to bring up is basically only really pertains to 401 K plans. It's called hyperbolic discounting, and that is literally where you are willing to take less pay at a job because they're willing to match your 401 K. See, like so say you're, you know, like there's a job at x company that pays $40,000 a year but the Y company will give you 35 But then they'll match your 401k We are doing a hyper hyperbolic discount where you're actually postponing instant gratification for future rewards. It's a it's a bias that because somebody where the reason it's a bias is because that big of how they simplified it is would you prefer $1 today or $3 Next year most people most people would take the dollar today because it's sure thing they don't know what's going on next three years. Or next year. So investing people will actually take the the treasurer like I know when the I bought the iPhones or I bonds wherever the hell they were called T bonds were like 6.5% a lot of people took that rather than taking like the tips treasuries that had a higher yield but they were further on down the road. They were actually applying longer lock period. Yeah, you take you in so the the T bonds. I think they're T bonds. Correct me if I'm wrong, I believe they're T bonds. The T bonds were three months and the tips bonds. A tip things were six months or 12 months but you're actually making more on the tips. So they didn't I
have a lot of that one. And I think it comes into play with the fact that humans are more short term oriented mode many people I guess it depends on your personality, but more people are short term oriented. And it's because we don't know all the factors that are going to impact us and potentially are like emotions are the other things that come into play. So like I would have an aversion to the T bond thing because of the long term factor. If I had more data going into that and I could make a better logical decision. I would probably err towards the side of the longer term investment for the better output. But if I had no idea what other potential investments along the way would be available, I think I would hesitate to lock that in. But I see a lot more people going in like I think this can also be applied to the people who delay in vesting in retirement accounts are contributed in the retirement account, because they're afraid of losing because again, it goes back to that that a loss aversion.
These are all kind of tied
into this loss aversion. They look at contributing towards their retirement as actually losing current income, which is technically true. But if it's generating you more income in the future, you kind of have to open your perspective on that to get away from that negative personification or like aspect of looking at it like that.
The biggest the best way that you can see this happening in the investment world is I can't think of one study that I have looked at that doesn't say long term dividend growing stocks is the best way to invest and yet you have millions of investors that invest in like cryptocurrencies and Penny stocks. And the next big thing that's
concessional component everybody thinks in hopes that quick return they want that short term return on on ever really bad. I hold on to garlic I'm sorry. I'm facing you right now.
Oh my goodness, but that's like the biggest example there rather than take the long the long game to get wealthy they'll take the shortcut trying to get wealthy and then take
a lottery option over the actual guaranteed, which is fascinating. But another factor back to the retirement thing. Like this, some employers actually have I've read this in multiple finance books, I ended up reading multiple some employers will actually offer a plan that when you get a pay raise, you can like before you get the pay raise, you can actually lock into a promise area for yourself so that when you get the pay raise, you don't ever experience the increase in income. So it doesn't feel like a loss. But that difference in income then goes right into your retirement account. So it's almost like you're setting yourself up. You're kind of preemptively setting yourself up to succeed without really taking a loss at the same time or psychologically feel like you're taking a loss. I mean, they've come up with all sorts of different stuff to get around the fact that they no humans have this like last bias
as to how my brain functions like some of these things don't make any sense to me. That's why it was fascinating when I was researching. Oh,
it is it is and I have the same thing too. It's like I definitely have a lot more of these in Tim does, but I'll also sit with them long enough that I'm like okay that doesn't even make sense I'm rationalizing
literally makes no sense to me because every freaking article you read says the way to get wealthy long term wealth is dividend growing stocks and your investment in the long term so I don't even bucket preaches that doesn't that's all he gets. Values like he does the value approach, but he still hold on to him for X amount of years. And so like it doesn't make sense to me how you're trying to say that like, I mean, I guess like it's kind of like when 96% of all scientists say climate change is the thing and then the people are like, Well, no, there's the four. It's like that kind of logic. That's how my head feels when it comes to talking about some of these biases. So you're telling me 96% of economists say the best way to grow your be wealthy is to do dividend growing stocks. And there's millions of people that listen to the other four say no, no, no, no. So that's good, but you can make millions on this penny stocks. So that's
actually where that overconfidence one comes back into play where people one of the biggest mistakes that investors make is thinking they can do better than the average or the experts because people have this massive aversion to being average, but average returns isn't an identity of being average. It's average returns are actually excellent. Like it's a whole warps like one
never had that problem because I understand to get the quote, average returns I have to invest like all the hedge funds do and I'm not really interested in I don't really want to be doing this for 40 years. Yeah. So I tried to expedite I got so I pick and choose data from different hedge funds and different investors and I put it all together, mash it all together and came up with this.
One, that's what you were talking about. They'd rather have that guarantee dollar today than potentially maybe $3 in the future. But if you look at this approach, there have been so many people that have done this specific approach for years and years and years. Like there's all people out there that have validated the approach works. To me that's more guaranteed than a potential lottery gamble on a growth stock that quarter may or may not go to where people are like Oracle ball trying to predict we have no idea where prices are really gonna go. But dividends and past record of actual dividend payout is a way more like guaranteed and so that to me, like even though it's so far future that seems more guaranteed to me then even the quick water it wins. To me that's like backwards psychology.
I guess now though, valiant pronounces next verse heuristics, I think it is heuristics. Okay, we have three of those. And basically, what is heuristics is simple in simple terms. They're basically simple rules, rules of thumb that people use for making decisions. How would they be cautious? Essentially, there are mental shortcuts that allow people to make decisions and solve problems quickly, like, like I do this a lot like I must, but like when they just become principles, never put all your eggs in one basket that's diversified diversification is like, that's actually founded on a heuristic, a fancy term, but basically, it's just a shortcut. So you don't like so like
what I do with the for Dummies approach. When
I'm researching a potential investment I have a huge basically a heuristic shortcut that I use that I look at like the revenue and the cash flow and the debt and I don't research the whole company I just research like six or seven bullet points that's technical once
you and that's the thing with learning any any new topic once you do it enough times you know where you can shortcut where you can cut out time and still get like the same output
not to me. I think these are way more detrimental than any of the anything else we discussed today. Like what the biases we discussed last time. Those are way more important the ones we just discussed. But they're, they're there. These are way more important than the biases we just discussed the risk aversion, the loss aversion, blah, blah, blah. Availability. heuristic is basically a mental shortcut that relies on examples that come to a person's mind whenever they're, whenever they're evaluating something or they're presented presented with anything. What the hell are you talking about? The more the more often that you hear something the more familiar you get with more of the often like some of the more often that you hear that Amazon's the best stock ever. Generally, like you're more like you're gonna believe it, believe it. So where this is a batch is that where you get your news from? Like, can you get your news specifically from safe?
Garbage in equals garbage out via Yahoo Finance,
and you don't deviate from Yahoo Finance at all, while Yahoo Finance is trash. I mean, I use it every day but it's trash. I only use it for certain things. I don't actually do research with it.
So to me all all eggs in one basket is the same as listening to one source of info. It is just as detrimental because one person is
examples I came up with were annuities. People have been pounded over and over and over and over and over about just how crappy Do you know annuities are and that's not so people all believe that annuities are bad. Like, they're like, Oh, they're terrible. I don't want to do any annuities actually have a pretty good place in an investing portfolio.
And there are different kinds of ways. There are different kinds of depending on circumstances, they are not all created equal and the right the good ones are phenomenal with what they can actually give you. They can actually set up a passive income without having to do everything that we're talking about.
Then on the flip side, another example would be like if you hear over and over and over and over that your 401 K is for your retirement, you are not going to cash out and you're not going to take a loan so you're gonna go further and further in debt or you're gonna miss investment opportunities because you're you refuse to cash out you're like cash out poor part of or your entire 401k which
can be good and bad, depending on the circumstances, because it can save the people who just are spreading thrifts.
I'm like the reason that I think this one's more detrimental than anything we've discussed today is because the media and all the people that type up the publications and send the emails and everything to you. They know that the human trade is to remember negative Yeah,
so that's why all the news all the media pumps the bad stuff because that's what gets lodged in our memories. You're
actually not You're not indulging your mind with anything positive so all your mental shortcuts are going to be negative and then then
pain avoidance the cause problem with that though, they're actually leading you where they want through fear and like manipulation in that regard. And
that's why I think it's no it is detrimental. I think it's the most detrimental thing so far is because if you just hear negative shit all the time about everything you're gonna be in gold and silver and have a bunch of bullets living in a cabin in the woods.
Right, waiting for the end to come that may or may not ever actually happen, where it might have not happened, how we think it's gonna happen. It might very well be in full swing right now.
Like how like what like the big one that I've been reading currently, is because we're gonna do an episode on cryptocurrency we haven't heard anything from anyone but that one's coming. How cryptocurrency the devil is actually not there's no there's no tangible assets. It's stupid this thing ever. It's all just a Ponzi scheme bla bla bla bla bla bla bla bla bla we hear like that's all you hear about cryptocurrency. So there's a large portion of the population that are petrified to invest cryptocurrency because all they hear is that it's crap.
And there's definitely a lot of pitfalls. It is the wild
west part but that's the reason I think it's so detrimental is because the same the same institutions that are saying cryptocurrencies garbage, are basically driving the price down so they can pick it up and then they will come out in two or three years saying this is the best blockchain ever
you're gonna completely pivot on their viewpoints and then they're gonna have so many assets and then all the other people do with those newsletters, they pimp stuff after they get in at a good price.
They're gonna have all the assets and they're gonna take like a year they just sit there and keep telling you about how great cryptocurrency is how great like they do with home ownership how great owning your own home is, it's like the but they were talking about how it's crap forever and that you should rent or that you should never own own your own home but then once they owned like majority of the homes and they're saying homeownership is the American way and all this crap,
that higher value and higher price they're making, they're essentially sucking to
me is why this was so detrimental because everything that you read is negative except for what I say because you know I just say I just told you the truth. dividend stocks are the bomb. Well,
I think it's more the intention they're driving you to line their pockets.
So like I don't make any money from this. Yeah, they're they're driving
you to line their pockets and to me, they're pushing everybody into the herd mentality that keep up with the Joneses the like call the trend crap and we're just like, that's interesting. We're gonna
go to this one, and that's what we're gonna discuss is one that I am so I used to be super, super, super, super guilty of, and I sometimes still catch myself being guilty of it. It's called mental accounting, the accounting, mental accounting, and this is when you place different values on money and based on how you came to my so say you buy a lottery ticket, you hit it hit it for like $2,000 So what do you do with the $2,000? Do you invest it like it was a normal paycheck or do you say, Oh, I have a free $3,000 And I'm just gonna piss it away.
That's fine. I do not have this one.
I have this one really bad I know you'd be bad. I
just got a free money I could go eat frescoes at Hardee's for like three days.
The only aspect to quote unquote free money that I've never been super frivolous with is my tax return. Because that's not really free money,
whereas everybody else considers your tax return free money but it's not free money. It's money that you lent the government for free, and they're paying you back with no interest later.
So think about that one square we attend to assign a subjective value to our money, usually in ways that violate our basic economic principles and our saving habits. Based on where we got the money. Although $1 is $1, like if I win $5 on a lottery ticket, and then I or I get paid $5 on the paycheck, it's the same amount. It's literally the same amount of money, but I haven't this one has a completely different meaning than the paycheck. So that might be a better way to so whatever your paycheck is, imagine you hit it with a you got a lottery ticket, you hit that and you say your your most people's philosophy is all that's free money, even though it's the same as your paycheck is the same. So what I did to get over that is I actually started equating expenditures with hours work and that actually helped me a lot to not completely eradicated but I've mitigated a lot.
If you start thinking about money in terms of the life energy that you have to exert in exchange for a commodity or a thing. You'll start thinking about money as a different, completely different viewpoint. So like, what Tim just said, if you equate it to five hours of work equals like this hamburger cost me two hours of work or whatever, and
like, I think the big way that they actually will play on your mental accounting thing is when they use that fucking phrase I hate is you don't ever invest money you can't afford to lose. Because if you can afford to lose the money that you're investing, you're putting a different value on that money than you pay your house with. That is true. So you should never actually have that mentality that I can only invest money that I can afford to lose because then you're actually putting more value on your house and your car and like the money that you spent on your mortgage than you're like, it's all the same. Like you basically have to think of money as a tool no matter how you obtain it. And then you have to think what you're gonna do with the money tool that you have. So the
way I get around this is I look at my money as How can I leverage my money to give me more output than just the money so like, anytime I come into like extra money I'm like, What can I do with this to give me more money than I have?
And they did a study after I think this study this one was done, I think in United States but basically, like for whatever reason, when people were invested in stocks that went up say like 30 or 40 or 50%, in the short term, they viewed how we say house money, like they take their initial investment out, and then they have that extra house money they just made to do whatever they want, they can do they can be speculative with penny stocks, whatever. So when we say house my nest X and not like that's not how I like think of it that's I take my initial investment out so if the money left in a certain investment, that's compounding interest, dividends and interest at that company went bankrupt. It wouldn't be the end of the world because I already got my initial investment out Yeah,
to me, it's just like a risk reduction tool or strategy that takes the pressure off and turn stock investing more into a game which is kind of what it should be. But
what they like what they how they refer to house money is literally like you want to go back and gamble more you basically get more liberal and crazy with your investing because you have plenty of extra money. It's free
money that you can get more more risky with and that's not how we look at it. Yeah, that's interesting. I don't have that one at
all. Okay, then the last one is called default heuristic and that do explain I'm not guilty of it but basically it's people that over buy and over sell because they always just buy and sell like there. It's basically autopilot whenever you're on autopilot so think about in your day every day when you wake up in the morning and then you have like certain habits like I go downstairs and get up Abella that's like you get up and you sleepy? That's like a bot that's like a default irrespective of the first like I'm on autopilot. I just go get a thing of water and I drink that like people actually have that when they invest. Okay,
so it's one of the things that we've noticed with life if you're doing things on autopilot or you're doing things out of habit without conscious awareness or intention, they those those behaviors that are patterns now may no longer be serving your current goals. So you've got to be really careful about that. So from the investing thing, yeah, that's a big one.
The one that I used in the newsletter is so if your default setting is you take money out of your paycheck every week, and you automatically automatically invest it in the stock market. That could be good, but it could also be bad like if you are like say in 2008 You're doing the same thing even though everything that you were reading says that there's gonna be a problem soon. And you kept taking their money out and invest in the stock market and the stock market went down 80% Then it caused all sorts of like other problems. So then it then it led to like, loss aversion, you're like, oh shit, I just wasted like 60% of my income. But the
people who didn't pay attention to that and continue to invest actually came out better.
But what happens with the default thing is sometimes it actually will startle you because you just been on autopilot for years and years. It's your investment and then you lose your account and your account is down 50% You're gonna have another one of these biases or something who's going to click in and you might not actually make that money back because you're going to be so that's why I basically say you should I look at my overall portfolio every day. I only really do like extremely work like once a quarter like not with every investment whenever they report earnings. I'm going to do like an in depth thing, but like I look at the every day just to make sure there's no surprise news that I that happened that I Oh, how long did it take you? 10 minutes. So that's not
terrible. To me. That's the equation of reading the newspaper in the morning the smell
bugs here's like the reason that we went through this boring as long as nasty topic. This is going to blow your mind all right. I was looking at looking at that cycle obviously there after I did all the research. I was like why did I just do that like that? I mean, I'd like psychology but like why don't I just type up this humongous long ass thing. They've done combo countless studies. The most recent one that I could find is an average of the National Library of Medicine. And they basically came to inclusion is the higher the more bias the more biases that you have. When looking at investing in the company, the higher probability that you will invest in the company and so if you're if your biases are flawed, you're going to make a piss poor decision. Because the probability is there like if you have say you have confirmation that you like herd mentality you hear that this stocks a great thing then you have the confirmation that we win, then you have overconfidence like, oh, I can't be wrong because I'm such a great investor. And then you have confirmation that every like all the news that you're reading, basically the lid is validated validates your point of view. You have three flawed things going on, right? There's psychological triggers going on right there, the probability that you'll invest in a poor decision is 55%. If you have three and it goes up to like, if you use five it goes up to like 80%. So if you have a flawed approach or your strategies, psychologically messed up probability of you making a bad decision that rose colored glasses on super, super, super high. So that's why I want to I want you guys to actually be able to identify them like oh, you probably you might want to actually, upon hearing this if you get bored just type in like investing biases or something like that, x psychological biases, because I don't know if I did a really good job explaining.
These are a lot easier to see if you're looking or like paying attention to somebody else. Like have you ever been listening to somebody talk about somebody they dated or something they did and you're like watching them and your eyes just get big and you're like, I don't even understand that thought process. Who the hell in the right mind would have that thought process? Why would you be looking at that? How could you be that delusional? That's what's happening when you have these biases you just don't even know you're deluding yourself into making questionable decisions or decisions from the wrong.
Well, that's more of like, my guess my intuition is good on that regard that if I have an inkling that I want to buy something, I almost always table it for at least a day before.
That's one of the best ways to avoid making bad decisions is to wait because then you're that then gives your emotions time. Well, the
reason I do it like saying like I like I get a video or I get an email or I get like a newsletter that says this is the best thing ever. And I let you know when you read that you're like Well, that's all
so I know I get intrigued. You get the emotional burden.
But what I do when I wait is I literally will just I read the article I look at what they're talking about. And then I just put everything away for like an hour, two hours. And then I let that I let that I don't know if it's dopamine. I don't know what it is. That causes you to have that. Oh, I want I must buy this because it looks really awesome. It's dopamine. So dopamine goes away or endorphins goes down, and then I actually look at it from a logical perspective. Once I'm not like high on crack personally. I have biological feminine that still looks good after I look at that. Then I'll probably by majority the time it doesn't, to be honest, like if they've done a really good job being able to like they fluff stuff to wind you up to the point where you're like, Oh, I must have that.
Their goal with marketing is to get you to make emotional decisions. So if you give yourself time for those emotions to dissipate, and then if you actually most people want to avoid the pitfalls. I actually am like, okay, is this actually a valid claim? Let me find the holes in this argument if I can find holes in the argument, because most of the time those salespeople are only painting you one side of the picture. You want the whole thing so you can make an educated decision for yourself. That's how you make unbiased decisions, but your emotions can lead you to a place that doesn't mean you have to pull the trigger. To me emotions are actually
good when multiple emotions don't belong in investing.
Maybe for the initial peak of interest. They don't
belong because you invest emotionally might as well just not invest. Like it's not they don't go hand and guys are just getting. They have countless studies countless reports showing that humans are piss poor, emotional investors. Don't invest don't invest with emotions ever. It's bad,
good or bad emotions. That's why it's the fear and greed index. FOMO like, I'm so guilty of the FOMO trying
to get a motion like I want you to be robots.
He realized that's like improbable, right? I know.
It's like it's improbable, but like, the best way to invest is to look at things with X's and O's and dollar
signs. Those ones and zeros ones and zeros
X's and O's. Decimals percentages like you want like all that boring math stuff you want that to be in there. You have to look at the revenue you have to look at the debt. I mean, that we talked about the the epic sales yet no, like one of the next one. Oh, well, we'll see what happens whenever you make dumb decisions on they weren't even of emotional decision. So they were covering more. No, like, I got two of them. I would buy again. The same with the same information that I knew at the time and the same research that I did, which I've done with every every investment that we've made. I would buy the two of them
and sometimes the odds just don't line up in your favor. But the odds be ever in your favor. Sometimes it just doesn't happen.
So that is like I think the next weeks, maybe one of those weeks, either next week or the week after we're going to talk about the my Epic Fails of 2023 because they're hilarious. And you'll see what we're talking about but like I'm like because I use a logical approach. I actually when I was typing, typing up my like my just dumpster fire picks I made this year I said that I actually asked that like what I would I make the same investments into the three I would even even though we're down on them, I still would the one you would want like
you said you whiffed. On the DAT or something
that was higher than I thought it was. But
right now it looks like a good investment. Down the Helena No,
no, it's an awesome investment but like that's that's how you want to be like honestly, as an investor you're gonna have wins you're gonna have losers like losses. It doesn't you can't change your overall research and approach to investing.
If you continuously apply the same strategy, you're gonna win more than you're gonna lose. As long as you have
a good time. The best part about income investing is your losses can still be wins and I will actually show you that and talk about
that in that episode because huge like dividend this dividend approach saves your ass it is like the best training wheels ever fallen off the bike,
because there's a couple couple doozies a couple couple investments that we would be down a lot and that we're actually not down at all and because of dividends and then the drip. So
So covered our books, for sure. won't go into detail about that in that episode. This
was just the psychology the psychological journey of identifying potential pitfalls before they actually occur and being able to
like things that could hijack you and your success. So
now whenever I'm like shopping, I can see myself as actually doing a couple of these. I'm like, Okay,
there's that. I'm going to totally point out that extra money thing. Your mom gave us 200 cash. Let me go buy this random shit. I'm like, really, really? already had that allocated for something.
Yeah, so much more prosperous. I know. It wasn't exciting, but it's necessary. Emotion doesn't belong in investing,
but the next couple episodes are going to be fun. We're gonna talk about our total dumpster fires, some life lessons, we're going to do a portfolio review.
I've actually never done that we're actually going to do a W you're gonna know everything that we hold.
I think we're going to do that. For Christmas.
The thing is to be
Christmas. Yeah. That'll be our present to you our entire portfolio holdings
going forward. The first podcast the month is going to be like a month like the previous month review. Like what basically we were discussing this last night like well, like the first part of the podcast is going to be here's what the market did. Here's what the macro trends are. Here's without portfolio day because once you know the portfolio after Christmas, that's the I don't think the portfolio is gonna change much. I mean, I might like sell some shares and an investment and put it in to maybe something new here and there, but for the most part the portfolios set I like it, I like where it's at. It's actually is yielding a pretty good amount of money. It's it's the team 15 or 16%, a year portfolio that actually has a good mixture of really conservative picks, really good growth dividend picks, really, really really good value dividend picks and there's a couple pliers riskier. The higher like you know, 20 25% yields but they're not really that risky once you see like, what's going on with them. And then we do have a couple others I mean, I might not include those two that is income. I actually have a couple like Penny stocks and possible potential retirement stocks that have nothing to do with dividends just a little bit of money in them but because it gets so much easier once your portfolio is set up like investing is so easy because all I have to do at the end like when all I have to do now is when I get my dividends like the ones I don't have going back and automatically reinvesting I have to go where I want to put this money that's all I would literally have to do every month is like I think I'll put in that one that one had a down month
and that's really easy to do that smaller maintenance sporadically throughout the year.
And then I'll have obviously once it has earnings report I have to like check out their earnings make sure that companies still profitable and they're not going to go bankrupt and things like that, but that's why I don't actually give the percentages but like we don't have 5% and any one more than 5% Any one investment so like if something goes bankrupt they will collect the dividends for how long and I made a good good portion of my initial investment off.
Indeed indeed. But that's that there's
your psychology, the homework for the night homework. I think that Brian want to reread some of the
well yeah, I would say read listen to this, try to actually like catch yourself in some of these. So then you start getting familiar with what they look like within yourself so you can catch yourself when you're starting to look at stocks and investing to prevent yourself from Okay, so wrapped up the biases today. Next week's is going to be the bloopers and epic fails.
So next week you're going to hear about like my good job for the
year. Yeah, the big three, the big three, crash and burn like airplane exploded.
There's other ones that were down like four or 5% but like whatever. Yeah, but some
of these are huge, like the one was like a 70% loss 50% loss. This is a pretty big dumpster fire and then we're going to do the portfolio review the week of Christmas so you'll get to see everything that we're actually holding on
so there are only two left in the year. And then yeah, then we're gonna yield Max review of yield Max Awesome. Well, yeah,
that'd be a fun new new the year Fresh, fresh, clean slate. Teach you how to make some extra money. To stick in your
your if, if an investment is too good to be true. It normally is too good to be true. But there are ways around that I'll just leave that as a tidbit for the maximum we get. Yeah, so
if you had trouble getting through these tune in for the next three episodes and it's going to be like show Wow, entertaining us probably crying on one and actually getting every asset in our portfolios listed out so you know exactly what tickers we're in so you don't know we're not talking crap. And then talking about yield Max, we can show you ways to take tiny bits of money and actually generate
real real Max basically is the equivalent of a paycheck. So you've actually can either invest your paycheck like every week like you normally would. And then put your maximum profit or you can basically take your paycheck and invest in say worthy or something else and then you'd use the US yield Max as your paycheck that you were putting in every week. I
think setting up if you don't have a lot to invest right now if you can take your tax return or take that thing and get those your Mac's rolling, then you can actually start buying up and expanding your portfolio a lot faster using that as a tool. We'll talk about that in
that episode about about some good, that's a good one.
That's a really good, really good way to exponentially get your account off the ground. Three of the
three really good apps that's coming up, that's all that's all I'm done. With this one. So
thanks for tuning through this grueling mental challenge situation. We will see you guys next week.