John Burley makes a very valid point. No matter what you believe, if you believe, it will affect your outcomes. Take a few minutes to watch and learn.
Summary of John’s Video on Investment Bias
In John Burley’s video titled “How Your Investment Bias is Killing You,” he dives deep into the powerful and often detrimental impact of biases on investment decisions. Burley, a seasoned investor with a pragmatic approach, emphasizes the critical need to recognize and manage these biases to achieve long-term financial success.
Passive vs. Active Investing
Burley kicks off by discussing the merits of passive investing, noting that for those not willing to actively manage their investments, putting money into a Vanguard S&P 500 index fund will likely outperform 85% of professional money managers over the long haul. However, he highlights that even passive investors are not immune to biases that can cloud judgment and lead to suboptimal outcomes.
The Danger of Overconfidence
One of the key biases Burley addresses is the overconfidence bias, particularly among those who have experienced success in their investments. He points out that when things go well, investors often attribute their success solely to their skills, overlooking the significant role that luck plays. This overconfidence can lead to reckless decisions, such as underestimating risks and overleveraging positions.
Burley illustrates this with the example of real estate flippers who thrived during booming markets. Many of these investors, he argues, failed to consider the three biggest risks: market risk, time risk, and interest rate risk. As markets inevitably correct, those who ignored these risks because they believed in their own infallibility often face significant losses.
The Bias of Loss Aversion
Another critical bias Burley discusses is loss aversion, where investors who have suffered recent losses tend to believe that things will continue to get worse. This mindset can lead to panic selling or abandoning a strategy that could still be viable in the long term. Conversely, those who have made profits may irrationally hold onto assets or strategies, believing that their success will continue indefinitely.
Long-Term Thinking as an Antidote
Burley advocates for a long-term investment strategy as a way to mitigate the effects of biases. He emphasizes the importance of playing the long game, particularly in real estate, where assets are typically held for decades. By focusing on long-term cash flow and staying invested through market cycles, investors can avoid the pitfalls of short-term thinking and emotional decision-making.
He cites Warren Buffett as the epitome of a long-term investor who prioritizes consistent income streams over short-term market movements. Buffett’s approach, Burley notes, is less about timing the market and more about time in the market—a strategy that has made him the most successful investor of modern times.
The Role of Psychology in Investing
Burley underscores that investing is more about psychology and emotion than about specific techniques or strategies. He asserts that while new investors often search for the “magic” strategy, the reality is that success in investing is more about managing one’s psychology and staying disciplined over the long haul.
He shares the story of Ralph, a former student who has amassed a portfolio of 42 properties, with 32 of them free and clear, generating $55,000 a month in income. Ralph’s success, Burley explains, isn’t just due to his investment choices but also to his ability to manage his psychology and remain content with his strategy, rather than chasing after more properties or more complex strategies.
Awareness is Key
In closing, Burley calls on investors to be acutely aware of their biases. Whether it’s overconfidence, loss aversion, or the need to be right, these biases can derail even the most well-laid investment plans. By acknowledging these biases and adopting a long-term perspective, investors can better navigate the inevitable ups and downs of the market and achieve true financial freedom.
Burley’s message is clear: recognize your biases, stick to your long-term strategy, and let time, rather than emotion, be your guide. Be sure to join him at MAREI in September. He will be our guest speaker at the meeting on the 10th and he is teaching an all day investing workshop on the 14th. See the Calendar of Events for More Info.
