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Pinocchio Investors: How Investors Lie to Themselves

Posted By Barry Ritholtz On February 24, 2013 @ 11:00 am In Apprenticed Investor,Investing,Psychology | Comments Disabled

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My Sunday Washington Post Business Section column is out. This morning, we look at the lies we all tell to ourselves as investors.

Here’s an excerpt from the column:

“Every year I hear from a small segment of active traders who misread what the discussion is about, seeing it as an invitation to brag about their best trades. Astonishingly, these e-mailers have all significantly outperformed the markets over the years, putting up fantastic return numbers. They never seem to have a losing trade. They sold Apple at exactly $705 and bought gold precisely at the bottom. Even more amazingly, they got out at the market top in October 2007 and bought in at the exact lows in March 2009.

The polite term for these people is “fibbers.” Personally, I say it’s lying.

Mathematical probabilities make these claims of uniformly spectacular track records extremely unlikely. And what I find most intriguing is that these Pinocchio traders (as I call them) are not really lying to you or me, but, rather, to themselves.”

How exactly do investors lie to themselves? Here are just 8 ways I discuss in the column:

1. You know what your investment returns are
2. You can predict the future.
3. You know how costs, fees and taxes impact your returns.
4. You can pick fund managers.
5. You understand mean reversion.
6. You have a plan.
7. You can pick stocks.
8. You are saving enough for retirement.

What are you lying to yourself about?

 

Source:
Pinocchio traders with fantastic returns are lying to themselves [2]
Barry Ritholtz,
Washington Post February 23 2013  http://www.washingtonpost.com/business/pinocchio-traders-with-fantastic-returns-are-lying-to-themselves/2013/02/22/d46b14d0-7aea-11e2-9a75-dab0201670da_story.html


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[1] Image: http://www.ritholtz.com/blogwww.washingtonpost.com/barry-ritholtz/2011/03/31/AFWBwIBC_viewAll.html

[2] Pinocchio traders with fantastic returns are lying to themselves: http://www.washingtonpost.com/business/pinocchio-traders-with-fantastic-returns-are-lying-to-themselves/2013/02/22/d46b14d0-7aea-11e2-9a75-dab0201670da_story.html

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