One of the big issues investors face is preconceived perspectives. When we look at a stock, what goes on in our brains when we encounter a company for the first time? For the first 30, 60 seconds, or first couple minutes? That has a huge impact on our financial well being and how our portfolio does. In the first few minutes, you’re making a decision on whether you’re going to take a pass at a company, or spend another 15 minutes. And at the end of that 15 minutes, you’re going to make another decision as to whether you’re going to take a pass or spend an hour or two, and so on. No investor has enough time in the day, week or year, to look at anything more than a small handful of businesses in some depth.
Even if I look at the United States with its 3500 some odd publicly traded businesses, an investment manager can really not drill down on more than a few dozen of them every year. So they have to make a decision relatively quickly on which ones they are or are not going to focus on. Commitment bias that comes in once we start spending time on something, our brains play games with us. One of the games our brain plays is that we feel entitled. “Hey, if I spent some time on it, I ought to make money on it”.
And that’s really not how investing works. I think it’s very important to be aware of commitment bias, and to be very aware that the first two or three minutes that when you’re looking at a company are when you have to make the call. It’s okay to let a winner go, but more important not to let a loser stay.
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