We have seen the enemy. And he is us.
Truly, the hardest part of investing is not the balance sheet analysis or ratio calculations. It's the way we use that information. And I'm not just talking about the rational application of those numbers – that stuff is straight-forward (even if it takes some learning).
![The lies we tell ourselves are the most dangerous of all.](/web/20161217195800im_/http://www.theage.com.au/content/dam/images/g/t/9/d/s/n/image.related.articleLeadwide.620x349.gt9do6.png/1481575795183.jpg)
No, I'm talking about that part of our brain that gets little consideration, but is responsible for some of the greatest ever investment mistakes – our psychology. You see, we all like to think we're rational. And even those of us who admit to being emotional sometimes will tell ourselves that those times are rare – and obvious. And they often are.
The biggest problems we have are those psychological traps we fall into without knowing it – or, as Mark Twain wrote, "It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so." Think about that for a second.
There is a whole, relatively new, field of study known as behavioural finance. Warren Buffett was an early convert (before, unsurprisingly, it had a name). Here are some of the traps we all fall into:
"I'll wait until the price goes back up before I sell."
Sorry, the shares don't know you own them. Maybe they go back up, maybe they don't. Hope isn't an investment strategy.
"It can't get any worse."
It can. As my colleague Matt Joass quoted the other day, a stock that falls 90 per cent is one that fell 80 per cent then halved again.
"I'll wait until it starts going up."
A statement that's only proven in hindsight, so it's worthless. Besides, once it starts going up, what's to stop it going back down?
"The smart money …"
There is no smart money. There are investors making money the old-fashioned way (getting rich slowly) and "helpers" trying to sell you things … such as the stocks the "smart money" is buying.
"I knew those shares were going up."
No, you didn't. You guessed, and got lucky.
"I should have sold. I knew they were going down."
No, you didn't. You guessed and were wrong.
"I'm a long-term investor. But …"
Price falls suck. Bad news can be painful. Patience is hard. If you've done a decent job of selecting stocks, I'd probably be doing you a favour by forbidding you to ever sell.
"I"m not cut out for investing, five of the last 10 stocks I bought are down."
So are everyone else's. And remember, if you're trying to beat the market, you're actively disagreeing with it. Don't expect the market to come to its senses any time soon.
"I have a fancy trading strategy to maximise my gains and protect me from losses."
No, you don't. You are falling for the "don't just sit there, do something" lie. And even if you are making gains, you're almost certainly getting killed by taxes and brokerage.
Foolish takeaway
Most of us will see ourselves in at least two or three of the "lies" above. And if you don't, you're either Warren Buffett or you're lying to yourself. And that's the most costly mistake of all.
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Scott Phillips is the Motley Fool's director of research. You can follow Scott on Twitter @TMFScottP.