Human weakness in investment –incapable of self-reflection

There is a saying that “love is blind”. This means a person in love would not be able to see any imperfection in the lover. This is maybe an extreme case. However, people do have the tendency of refusing to change their position when the relevant situation having been changed, or have bias on anything against whatever they initially believed in.

For example, a boy was brought to the same church by his parents frequently, he would not only mostly likely believe in the same religion when he grows up, but also strongly reject any other religion or atheism.

The same thing happens in stock market. When people, no difference being individual investors or institutional investors, already have a long position in the market, they tend to collect any relevant information, analyst it and present it in a way to justify that the market will go up further. The same kind of people also likely has a love affair with the company, of which they hold shares, and also with the relevant industry. They reject any information they don’t like, just like a person in love.

In fact, most of people are incapable of self-reflection and unwilling to accept that their current position can be wrong. This is the very reason a stock market will eventually go burst from time to time.

Good investors do just the opposite. They seek information or views that are different than their own and they update their beliefs when the evidence suggests they should. They are always ready to reflect on themselves to avoid making decisions based on bias instead of rational reasoning.

Warren Buffett's partner Charlie Munger said that he really liked Albert Einstein’s point that “success comes from curiosity, concentration, perseverance and self-criticism. And by self-criticism, he meant the ability to change his mind so that he destroyed his own best-loved ideas.”

Li Ka – Shing made most of his money in real estate including properties in China. However, when most of people were still on the buy side of real estate properties in China, he started to sell in 2013 and has sold almost all the properties he owned in China since then. I believe that he exceeded so quickly, completely and decisively from China market because he foresee serious economic and political crisis coming in China based on the information he gathered. As a great investor and businessman, he has been keeping on updating and self-reflecting.

Now, 3 years later, the prices of properties in China is still going up even in a more dramatic speed. Many Chinese people believe that the price will go further up and the government will not allow the real estate prices to go down. They may laugh at Mr. Li for his early exit. These people never look into any views against their belief and brush off any alarming signs of real estate bubbles. The only way that they will be able to learn the lesson is a market crush, something similar, if not more serious than the subprime mortgage crisis in US in 2007.

In fact, no great investor is able to time the market, or predict the craziness of people’s greed. History will tell that Mr. Li made brilliant moves between 2013 and 2015 before long.

Self-reflection is not only important in investment, but also in every aspect of one’s life, being in relationship, corporate life, or public life. Without such capability, one can only learn lessons in hard way and end up in severe consequences.