I spend a lot of time talking with people. In a sense, talking to people and listening to people is what I do for a living. During the process, I hear a great deal of what investors are thinking. What they think is going on in the world, what has happened in the markets, the big risks (real or otherwise) they perceive in the investment world, etc.
The more people explain how they see the world, the more it becomes apparent how their biases influence what they believe. We live in a time when it is easy to eliminate informational sources that don’t reinforce our viewpoints. As a result, it is easy to not see the full picture of the world around us. Our biases can be misleading when we allow them to act as our informational filter.
As a little exercise, (and without the help of Google), what do you think has happened in the last three years in regards to;
- inflation (higher or lower than historical averages?)
- gold prices (up or down over three years?)
- government spending (higher or lower over the past three years?)
- gas prices (higher or lower?)
- the US stock market (returns over the past three years?)
- interest rates (higher or lower?)
Ready?
Inflation:
Inflation has run well below the long-term average of 3% for several years, and is currently closer to 1% despite claims of runaway price increases amongst Fed stimulus.
Gold prices:
After a multi-year run, gold prices have been in decline since 2011, and are off almost 35% from the high.
Government Spending:
After a huge increase in expenditures during the recession that began in 2008, federal spending has flatlined for nearly three years, in part due to the sequester.
Gas Prices:
After peaking early in the recession, subsequently crashing and recovering through 2011, gas prices have gone nowhere.
Stock Market Returns:
Most people would acknowledge that the markets have been strong lately. But would they realize that through 11/21/13, the S&P 500 had returned 16.89% annually for three years, a total return of just under 60%?
Interest Rates:
Interest rates (looking at the 10-year Treasury yield) turned up in 2013, but are still lower than where we were three years ago, and well below post-recession highs.
My point here isn’t to make sure that you know what interest rates and gas prices have done in the last three years. Instead, consider how many of these were the opposite of what you expected. How are you letting your perception of the world mask reality? What sources of information are you relying on, and are they accurate?
While it’s dangerous enough to try to make short-term investment decisions based on the information you actually have, it is reckless to try to make these decisions when your biases are blinding you to the facts. We must be aware of our own biases and behavioral “shortcuts” that can lead to bad decisions if we ever have hope of making good decisions.
Bason Asset Management 