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Overconfidence, The Final Four, & The CFA Wealth Management Conference

As I was buzzed through the appropriate doors and circumnavigated the new security system at my son’s school, the thoughts continued as to the validity of pulling my son from school early for the Final Four activities downtown. The receptionist helped me with my mental gymnastics, justifying my predetermined decision… he gets good grades, experiences matter, we (Minnesota) don’t get big events like this too often, etc.

I picked up the excited boy, thanked Julie the receptionist for the parental therapy, and drove downtown discussing our brackets and the weekend of games. The semi-finals were on Saturday and the final game on Monday. From an early age, I encouraged an open discussion of gambling. The result is an 11-year-old with a firm understanding that there is no free lunch. And that gambling is an activity that must be moderated.

Overconfidence permeates almost everything we do, especially gambling and investing. I was reminded of this while watching the CFA Wealth Management FL conference (via a great new streaming feature, I was not fortunate enough to attend in-person). Daniel Crosby, of behavioral economics fame, spoke at some detail about how overconfidence affects our financial and investment decisions. I have observed this on the investing and gambling side of things many times. My son regaled us with many tales of his friends bragging about how their NCAA brackets would fare. It was clear this was not just hubris; they actually believed they had superior knowledge and skill.

I see similar attitudes with clients on the private-client side and employees on the employee financial well-being side of my business. The behavior that is the most concerning is those who think that short-term trading should be their primary path to financial independence and wealth creation. 

I often give presentations on the historical return of stocks and bonds. When combined with the magic of compounding, they can lead to amazing growth and a high net worth. But for many, normal investing is too slow and not nearly enough. Instead of the potential of doubling their money in 7-8 years, they have been sold that they can do it in 1 year or less.

The future day traders will tell stories of coworkers with huge payoffs, and all they have to do is study and practice, and they will do the same. When asked if they have seen ALL the trades of their mentors, to verify if they repeated this success over any extended timeframe, the answer is always, no. Much like the gamblers I dealt blackjack to in college, they will only highlight the wins and not the losses. 

For those of you not familiar with short-term, or day trading, it is most often based on technical analysis (analyzing charts) and/or finding a short-term event to move a particular stock. If you were able to predict that Boeing’s 737 Max was going to have a software issue, you might have been able to make a lot of money. But even if you are privy to “Blue horseshoe loves Anacott Steel,” trying to time this superior and maybe illegal information can be difficult. The reason being is that in the short-term the market is full of noise and emotion. Even if there is actionable data from a chart, or the investor’s superior talent, the odds of that investor being the only one that knows the tradable information is small. The market isn’t always right, but it’s fast and efficient. Thinking you can consistently predict the market in the short-term is the very definition of overconfidence.

This overconfidence has been fueled by the extended bull market of the last several years. Even if I do find day traders that do have a positive return over more than a month or two and are willing to show all their trades, they usually are not beating the major passive indexes. The odds of the day trader beating the indexes after taxes and trading costs declines further.

My son won his pool, he had Virginia going all the way; although, I often remind him of the non-call double-dribble that got them to the final four. My hope is that as my children grow, they will have confidence in everything they do. But I also hope they have the wisdom to temper that confidence so they don’t confuse gambling with investing.

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