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Why Negative Thinking Makes You A Better Investor
06-05-2019, 10:24 AM.
Post: #1
Why Negative Thinking Makes You A Better Investor
Source: http://musingzebra.com/why-negative-thin...-investor/

What does going into space and investing in the stock market have in common? Both activities engaged in a high risk, high uncertainty environment. Whereas astronauts have to deal with the risk of 526,000 gallons of propellant blowing up beside them during takeoff or the shuttle disintegrating during re-entry into Earth’s atmosphere at 7.8 km per second, investors have to deal with the risk of changes in the business competitive landscape, permanent loss of capital, psychological misjudgment, and the unknown-unknown. If that is the case, is there something we can learn from astronauts on how to deal with risk and being ready? Plenty.

It is easy to picture astronauts as cowboys and risk-takers like Bruce Willis blowing up asteroids in the Armageddon movie. In reality, it is the opposite. Chris Hadfield, a Canadian retired astronaut, wrote in An Astronaut’s Guide to Life on Earth that one of the most common questions astronauts ask themselves is, “Okay, what’s the next thing that will kill me?” When astronauts are not on a space mission, they’re training in deep pool, simulators and mission planning. They prepare for all kind of eventualities on what can possibly go wrong so they know what to do in those high risk situations. 

Quote:“Training is something we do to reduce the odds that we’ll die.”

Similarly, investing is first and foremost about managing risk (not making money). Just as astronauts don’t go into space with a hope that everything will turn out as planned, you don’t go into a position only to ask “Should I hold or sell?” after the share price has fallen by 50%. You have to pre-empt it. In other words, you need a plan.

Quote:“A lot of people talk about expecting the best but preparing for the worst, but I think that’s a seductively misleading concept. There’s never just one ‘worst.’ Almost always there’s a whole spectrum of bad possibilities. The only thing that would really qualify as the worst would be not having a plan for how to cope.” 

Whenever you buy a stock, you’re making a forecast. You’re thinking there’s a good chance to earn a satisfactory return (from dividends and share price increase) based on certain assumptions about the business. But that’s not investing. Investing is being ready to deal with a whole range of negative possibilities as they arise. The emphasis here is about avoiding the downside of not having a plan. When you have a plan, or an exit plan, you can perceive the market more objectively and reduce the likelihood of personalizing your position through confirmation bias. You’re also less likely to get surprised and panic when something goes wrong. What happens when you panic? You make stupid mistakes. Being prepared is more than knowing what to do in a bad situation; it prevents you from making things worse. 

Quote:“Having safety procedures down cold might save my life someday, and would definitely help me avoid making dumb mistakes that actually increased the risks.”

Rushing to sell everything during a market turmoil is a classic example of unwittingly adding more risk to a bad situation. This is the reason why knowing what not to do is far more important than knowing what to do. If you can identify 20% of your mistakes that contribute to 80% of the losses and stop doing them, your return will improve exponentially. 

Now, you might think all these negative thinking is depressing. At this rate, we are probably not going to end up buying any stocks. But it is actually the opposite. Instead of being paralyzed by fear, negative thinking is liberating. It makes you more productive by becoming a better thinker.

Quote:“Nothing boosts confidence quite like simulating a disaster, engaging with it fully, both physically and intellectually, and realizing you have the ability to work the problem. Each time you manage to do that your comfort zone expands a little, so if you ever face that particular problem in real life, you’re able to think clearly.”

Negative thinking is a form of premortem. Whereas postmortem is an examination carried out by coroners to identify the cause of death, premortem study an incident before it occurs. In a premortem, you start with a hypothetical bad scenario (i.e collapse in sales volume or revenue) and you work your way backward from the future to the present by identifying a series of minor events that lead to the major event. Do you know why some people are more vigilant than others and able to act swiftly in a dangerous situation? That’s because they have spent their time thinking through how to handle every conceivable situation. They’ve done the drill in their head, “Okay, if this happens, this is what I’m going to do. But if that comes up, I’ll do this instead.” Along the way, they pick up subtle cues that improve their situational awareness. So when the Sh** hits the fan, they don’t think, they just act. 

Another important source of negative thinking comes from seeking out contradictory opinion.

Quote:“In any field, it’s a plus if you view criticism as potentially helpful advice rather than as a personal attack. But for an astronaut, depersonalizing criticism is a basic survival skill. If you bristled every time you heard something negative—or stubbornly tuned out the feedback—you’d be toast.”

You’d be toast as well in investing if you see your own opinion as a trophy to be cherished instead of something to be destroyed as fast as possible. It is about cultivating a “What if I’m wrong?” mindset. When you take into account both supporting and opposing evidence and weigh them accordingly, your judgment is going to be more accurate. You reduce the probability of being wrong and increase the probability of being right. 
Negative thinking is part of having the humility to acknowledge that things are harder than it looks. Many things are going to turn out differently from what we expected so it’s better to over prepare than under prepare. You want to always think about “What is the characteristic of the business?” What can hurt the business or my investment thesis? At what point will the advantage of the business become its Achilles’ heel? You want to kill your ideas first. A good rule of thumb to find out if you’re well prepared is whether your list of ‘what can go wrong’ is longer than ‘what can go well’. Humble yourself before the market humbles you. 

Quote:“Feeling ready to do something doesn’t mean feeling certain you’ll succeed, though of course that’s what you’re hoping to do. Truly being ready means understanding what could go wrong—and having a plan to deal with it.”



Notes

Hadfield, C. (2015). An Astronaut’s Guide to Life on Earth: What Going to Space Taught Me About Ingenuity, Determination, and Being Prepared for Anything.

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06-05-2019, 12:56 PM.
Post: #2
RE: Why Negative Thinking Makes You A Better Investor
The problem for "negative thinkers" is it can adversely affect other areas of family life . It may cause jealousy and friction with the wife who is suspected of having a secret boy friend.

Its better to be a value investor and a positive thinker .

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06-05-2019, 01:38 PM.
Post: #3
RE: Why Negative Thinking Makes You A Better Investor
(06-05-2019, 12:56 PM)soros Wrote: The problem for "negative thinkers" is it can adversely affect other areas of family life . It may cause  jealousy  and friction with the wife who  is suspected of having a secret boy friend.

Its better to be a value investor and a positive thinker .

I get your point. But this is a slippery slope argument. Imagine all the value investor traits: 

Example:
Value investor requires critical thinking - being critical/judgmental to spouse creates friction
Value investor buy things below intrinsic value - spouse being criticised after she bought a piece of painting art because it has no intrinsic value.
Value investor as a rational thinker - Gave $100 to my spouse so she can buy herself a bouquet of roses because rationally, there's no difference as to who buys it (she still get the flowers).

A cause B
B is bad
So A is bad

Logically correct but incorrect conclusion.

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06-05-2019, 01:56 PM.
Post: #4
RE: Why Negative Thinking Makes You A Better Investor
(06-05-2019, 10:24 AM)RJT Wrote: Rushing to sell everything during a market turmoil is a classic example of unwittingly adding more risk to a bad situation. This is the reason why knowing what not to do is far more important than knowing what to do. If you can identify 20% of your mistakes that contribute to 80% of the losses and stop doing them, your return will improve exponentially. 

Actually I think selling or reducing gross positions reduces risk. There's a saying that you sell until you can sleep because sometimes we can think better after we have less vested interest.

The question is actually: do we sell in the beginning of the turmoil, middle of turmoil or end of turmoil? The first requires forecast and scenario planning; second generally requires discipline to bite the bullet upon confirmation that things are not doing well. Both in my opinion are equally good for risk management though people generally imagine they can be the former. Last one generally is due to stubbornness and delusion until one's psychologically cannot handle the loss when primal fear or emotion takes over.

In my opinion I think the beginning of a 6-9  months turmoil is beginning.
=========== Signature ===========
Before you speak, listen. Before you write, think. Before you spend, earn. Before you invest, investigate. Before you criticize, wait. Before you pray, forgive. Before you quit, try. Before you retire, save. Before you die, give. –William A. Ward

Think Asset-Business-Structure (ABS)

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07-05-2019, 01:54 PM.
Post: #5
RE: Why Negative Thinking Makes You A Better Investor
Ha! Ha!

The only difference of U surviving or not in the market is whether whatever U read or come across U trust easily or U apply a little skepticism.

Example, out of luck ( or maybe my faith) i escaped buying any mini-bond or CDO products when they were popularly introduced because i read what the market was saying and always applied a little skepticism to any "new things" i come across.

i think many people got hook-winked because those mini-bonds or CDOs came with guaranteed money back.
But most people didn't understand or bother to find out under what terms the Guarantee could give U money back.

From that day on wards i am very wary of the 3 words "Guarantee Money Back" or the word "Guarantee".
i become a skeptic when i see this word - "Guaranteed"
Only Tax and Death are guaranteed.
All other things must verify.

At that time if U read enough about what the market was saying, U most probably would not touch even with a 6-foot bamboo pole the mini-bonds and CDOs.

NB:

If U are patient, the market will always tell u the "Truth" finally.
=========== Signature ===========
WB:-

1) Rule # 1, do not lose money.
2) Rule # 2, refer to # 1.
3) Not until you can manage your emotions, you can manage your money.

Truism of Investments.
A) Buying a security is buying RISK not Return
B) You can control RISK (to a certain level, hopefully only.) But definitely not the outcome of the Return.

NB:-
My signature is meant for psychoing myself. No offence to anyone. i am trying not to lose money unnecessary anymore.

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07-05-2019, 08:45 PM.
Post: #6
RE: Why Negative Thinking Makes You A Better Investor
I was wondering about this situation ?

A cause B
B is bad
So A is bad

Logically correct but incorrect conclusion ???.

"Negative thinking" causes "negative decision" leading to " negative result".
"Negative result" is bad .
So "Negative thinking" is bad.

If you are in negative thinking , you will probably select the wrong share.

So better to avoid negative thinking,

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07-05-2019, 10:36 PM. (This post was last modified: 07-05-2019, 10:40 PM by karlmarx.)
Post: #7
RE: Why Negative Thinking Makes You A Better Investor
(06-05-2019, 01:38 PM)RJT Wrote:
(06-05-2019, 12:56 PM)soros Wrote: The problem for "negative thinkers" is it can adversely affect other areas of family life . It may cause  jealousy  and friction with the wife who  is suspected of having a secret boy friend.

Its better to be a value investor and a positive thinker .

I get your point. But this is a slippery slope argument. Imagine all the value investor traits: 

Example:
Value investor requires critical thinking - being critical/judgmental to spouse creates friction
Value investor buy things below intrinsic value - spouse being criticised after she bought a piece of painting art because it has no intrinsic value.

I suffer from this all the time, to my detriment. I have been told on numerous occasions to just nod my head and agree to whatever she's saying. And not question whatever she is buying/bought.

I should add though, to her credit, that she's nice enough to tolerate this annoying part of me. From my experience, few women are like that.

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08-05-2019, 04:51 AM. (This post was last modified: 08-05-2019, 05:06 AM by RJT.)
Post: #8
RE: Why Negative Thinking Makes You A Better Investor
(07-05-2019, 08:45 PM)soros Wrote: I was wondering about this situation  ?

A cause B
B is bad
So A is bad

Logically correct but incorrect conclusion ???.

"Negative thinking" causes "negative decision"  leading to " negative result".
"Negative result" is bad .
So "Negative thinking"  is bad.

If  you are in negative thinking , you will  probably select the wrong share.  

So better to avoid negative thinking,

I have already gave 3 examples that becoming value investor is bad for relationship, should you avoid becoming a value investor going by your logic? 

Applying your logic further, recently there has been many accidents where toddlers get killed when vehicles reverse from the garage. And reversing speed is mostly around the speed of <5km/per hour 

Therefore applying your logic:
Car moving at <5km/per hour kills toddler
Toddlers getting killed is bad
Car moving <5km/per hour is bad, thus should be banned i.e passing a law

That is called slippery slope. Not leaving any middle ground for argument.

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08-05-2019, 05:02 AM.
Post: #9
RE: Why Negative Thinking Makes You A Better Investor
I would appreciate if you can explain why negative thinking causes negative decision? In the context of this article, the word 'negative' or 'positive' does not imply something as being good/bad or desirable/undesirable. 'Negative' is simply the opposite of 'positive' like black is to white, and those 2 colors do not imply which is 'better' or 'more preferred' over the other. There is no moral judgement here (which is subjective in nature). All there is is that negative thinking means thinking what can go wrong so one can prepare for it. So how does doing that exactly lead to bad decision making?

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08-05-2019, 09:32 AM. (This post was last modified: 08-05-2019, 09:56 AM by Temperament.)
Post: #10
RE: Why Negative Thinking Makes You A Better Investor
Is skepticism negative thinking?

Or is a skeptic having negative attitude or a negative person?

Don't we have to be a skeptic especially in the stock market or listening to a snake-oil sale talk?

A person without even a little skepticism is usually a good target for scammer, isn't it?

Can negative thinking be used or seen as a process of reasoning before a decision is made, rather than as seen that someone(aka skeptic) has already taken an unfavorable position of the matter at hand?

If so, does it means negative thinking is best use as a process of thinking rather than a position?

If skepticism can be taken as a process rather than a position, what's wrong with being a skeptic?

i am one of them usually because when i am not, i would be scamed or taken advantage of.

Another words, i allow to let my guard down.

Have U heard Teochew saying, "kaki lang pak si boh siang kang".

That is U usually let your guard down when with your own people because if not when can U relax be happy?

Or i prefer to be taken advantage of by own people then by a snake-oil sale-man because it is easier to be charitable & forgiving to one of you or own.

"Father & son don't keep grudges overnight".
=========== Signature ===========
WB:-

1) Rule # 1, do not lose money.
2) Rule # 2, refer to # 1.
3) Not until you can manage your emotions, you can manage your money.

Truism of Investments.
A) Buying a security is buying RISK not Return
B) You can control RISK (to a certain level, hopefully only.) But definitely not the outcome of the Return.

NB:-
My signature is meant for psychoing myself. No offence to anyone. i am trying not to lose money unnecessary anymore.

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