Why gold bugs, Amazon sceptics go ostrich – With insights from The Wall Street Journal

Use Spotify? Access BizNews podcasts here..Use Apple Podcasts? Access BizNews podcasts here..___STEADY_PAYWALL___.Why Gold Bugs, Bond Bears and Amazon Skeptics Think Alike.Investors often prefer to stick their heads in the sand rather than confront the evidence in front of them.By Jason Zweig of The Wall Street Journal.Aug. 13, 2021 10:00 am ET.Investing should be about seeing the future. That's hard to do when you are willfully blind..As the new book "The Cult of We: WeWork, Adam Neumann and the Great Startup Delusion," by my colleagues Eliot Brown and Maureen Farrell, makes embarrassingly clear, the office-space provider didn't implode without warning. Some of the world's most-renowned investors—including SoftBank Group Corp. 9984 -2.14% of Japan and venture firm Benchmark Capital—watched the entire train wreck transpire in slow motion. For months and years, they stood by, unwilling or unable to get out of the way..Many other investors have been blind to the evidence right under their noses. Fans of gold insist the yellow metal is a powerful hedge against inflation when it isn't. Bond investors have been vainly predicting a surge in interest rates for more than a decade. Skeptics of Amazon. AMZN -0.29% com Inc., perennially calling it an absurdly overpriced stock, have missed out on gargantuan gains..That's what happens when what you own—or scorn—becomes part of who you are. You don't just invest in gold; you become a gold bug. You don't merely think interest rates will rise; you turn into a bond bear. You aren't only skeptical about Amazon; you belong to the value-investing community, which regards itself as rational in a financial world gone mad..Before you know it, you've become a true believer: clinging to your investment idea as passionately, rigidly and unquestioningly as a religion or ideology..The longer you've owned an asset and the more you talk about it, the more likely it is to feel like part of who you are; changing your mind would seem like losing a piece of your self..That's great if your investment view is correct; you'll make lots of money. It's terrible if you end up being wrong; WeWork, once valued at $47 billion, is worth at most $9 billion today, more than an 80% loss in three years..The behavioral economist Richard Thaler of the University of Chicago christened this pattern "the endowment effect." The value you place on an asset will differ drastically depending on whether or not you already own it..In experiments in the 1980s, Prof. Thaler and colleagues sorted people into three groups. In one, you could buy a coffee mug. In the second group, you could choose to receive either cash or a mug. In the third, you were given a mug and the opportunity to sell it. Then everyone was asked: How much money is equal to having the mug?.People who already owned a mug demanded more than twice as much for it, on average, as those who didn't own one were willing to pay..Now imagine two investors: John owns Tesla Inc. stock. Jane is thinking about buying it. Considering whether to sell, John focuses on the pain of giving up something he already owns. Considering whether to buy, Jane focuses on the future pleasure of her potential gains—alongside the immediate pain of parting with cash..Because pain is more intense than pleasure, Tesla is worth more to John than to Jane. He will tend to keep the stock until the price rises so high that selling becomes too tempting to resist. If the price falls below what John paid, however, he will dig in even deeper: Now a sale is an admission of error that will shatter his self-esteem..As Prof. Thaler once told me, "What investors fear even more than losing money is having to say, 'What an idiot I am.'".All this not only makes you reluctant to sell a good investment gone bad. It makes you reluctant to see that a good investment has gone bad. It also can keep you from recognizing that some assets are so bad you never should have bought them in the first place..Such willful blindness makes you care less about the accuracy of what you know and learn. Instead, you seek to bolster the feeling that you're right..When you're highly confident, your brain becomes more receptive to information that confirms your original view, while the processing of other data that could disprove it is "abolished," a recent neuroscience study found..So, before you make an investment, ask what could go wrong afterward. Try the thought experiment called a pre-mortem. Assume that a year from now you've lost every penny. Then flesh out as many specific reasons as you can why your investment went to zero..That exercise should help curtail your overconfidence and make your mind less resistant to negative information..You can also try reversing the endowment effect by refocusing your mind on what you could gain, not lose, by selling. Think like a professional trader: If you didn't already own this asset, would you want to buy it at this price? What would you rather buy? What could you do with the proceeds if you sold it?.Another new book, "The Scout Mindset: Why Some People See Things Clearly and Others Don't," by podcaster and author Julia Galef, points out that some people think like soldiers: They will fight to the death to defend their ideas and attack those of others. Instead, you should recast your identity to think like a scout, who simply wants to learn the lay of the land..Rather than regard yourself as a value investor or a bull or a bear, you might instead think: "I'm the kind of person who takes pride in admitting when I'm wrong."The more often you defend your view in public, writes Ms. Galef, the more "changing your mind feels like letting the enemy win." Constantly reiterating your investment thesis to defeat your critics is a bad idea.Instead of evaluating, yet again, whether you're right, spend your time assessing whether they are.Write to Jason Zweig at intelligentinvestor@wsj.comCopyright ©2021 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8.Appeared in the August 14, 2021, print edition as 'Messing Up Is Easy. Admitting It Is Hard..'

Why gold bugs, Amazon sceptics go ostrich – With insights from The Wall Street Journal

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