Tips to Avoid Recency Bias in Investing

Thinking traps to avoid as a PM When you’re managing real capital inside a fund, one good month means nothing. What matters is whether your process can consistently generate edge, under pressure, through noise, in any market regime. Over the years on the buy side, I’ve seen even sharp PMs fall into these 8 thinking traps. 1. Authority Bias ❌ "They’re the expert. Must be right." ~ Daniel Kahneman, Thinking, Fast and Slow Experts are often wrong with confidence ✅ Write your thesis before reading theirs 2. Sunk Cost Fallacy ❌"We’re already in, let’s ride it out." ~ Joel Greenblatt often reminds: the market doesn’t refund bad ideas Capital doesn’t care how long you’ve held it ✅ Re-underwrite every day as if flat 3. Overconfidence Bias ❌ "I’m certain this works." ~ Philip Tetlock’s work shows experts are often poorly calibrated Confidence is not a signal ✅ Track your hit rate and recalibrate 4. Bandwagon Effect ❌ "Everyone’s leaning long." ~ Howard Marks warns that when something is popular, it’s usually priced in Consensus is often late ✅ Decide before you check positioning 5. Status Quo Bias ❌ "Let’s not rock the boat." ~ Peter Lynch: “Know what you own, and know why you own it.” Comfort isn’t a strategy ✅ Ask: Would I buy this today? 6. Confirmation Bias ❌“I knew I was right.” ~ Charlie Munger: “Invert, always invert.” You don’t learn when you only seek support ✅ Pressure test your view by actively seeking disconfirming evidence 7. Affinity Bias ❌"I like how they think." ~ Daniel Kahneman: We overweight likability in decision-making Likeability doesn’t equal insight ✅ Use consistent evaluation criteria for everyone 8. Recency Bias ❌"This time is different." ~ Stan Druckenmiller: “Cycles are more powerful than facts.” The last three months don’t define a cycle ✅ Zoom out and ground decisions in base rates These biases aren’t signs of inexperience. But in my experience, the best PMs build systems to think clearly under pressure. Munger called it a "latticework of mental models" for a reason. Great investors debug their brains like they audit a balance sheet. 📩 Join our newsletter for weekly mental models and buy-side research: https://lnkd.in/ekkxjp6z   #CognitiveBias #InvestmentProcess #BuySide #EquityResearch

I live and die by a single investment strategy. It’s simple AF and goes as follows. Whenever you go to bed wondering: “𝙄 𝙝𝙖𝙫𝙚 𝙉𝙊 𝙞𝙙𝙚𝙖 𝙬𝙝𝙖𝙩 𝙩𝙝𝙚 𝙬𝙤𝙧𝙡𝙙 𝙞𝙨 𝙜𝙤𝙞𝙣𝙜 𝙩𝙤 𝙡𝙤𝙤𝙠 𝙡𝙞𝙠𝙚 𝙩𝙤𝙢𝙤𝙧𝙧𝙤𝙬?” That’s the ultimate buy signal. But this strategy’s much harder than it seems. 𝗠𝗲𝗲𝘁 𝗺𝘆 “𝗕𝗲𝗮𝗿 𝗠𝗮𝗿𝗸𝗲𝘁 𝗝𝗼𝘂𝗿𝗻𝗮𝗹” I specifically recall two of those moments. The first was Sunday, September 14, 2008. If you worked in finance, you were on calls all weekend wondering if Lehman Brothers was going to file for bankruptcy. And no one had any idea how that would ripple through the financial system and the broader economy. Now I have the unsexiest investing strategy ever. I’ve been dollar-cost-averaging the S&P 500 since 1994, when I was 16 years old. NGL, it’s single-handedly made us rich. It’s been a remarkable strategy that has enabled a life of quasi-financial freedom. Yet in a crisis, it’s always been tempting to reset the strategy. To sell at the lows. Or to believe that 𝘵𝘩𝘪𝘴 𝘵𝘪𝘮𝘦 𝘪𝘵’𝘴 𝘥𝘪𝘧𝘧𝘦𝘳𝘦𝘯𝘵. So I created a journal to combat this bias. I call this my 𝗕𝗲𝗮𝗿 𝗠𝗮𝗿𝗸𝗲𝘁 𝗝𝗼𝘂𝗿𝗻𝗮𝗹. It’s a reminder, to myself, to stay the course for my (highly effective) investment strategy when it’s possible to doubt myself. It also acts as protection against these 4 behavioral biases (that always lead you astray): 1. 𝗟𝗼𝘀𝘀 𝗔𝘃𝗲𝗿𝘀𝗶𝗼𝗻: The tendency to prefer avoiding losses to acquiring equivalent gains. During sell-offs, your loss potential will be staring you in the face! 2. 𝗛𝗲𝗿𝗱𝗶𝗻𝗴 𝗕𝗲𝗵𝗮𝘃𝗶𝗼𝗿: The tendency to follow and copy what other investors are doing. During sell-offs, well you know what others are doing! 3. 𝗥𝗲𝗰𝗲𝗻𝗰𝘆 𝗕𝗶𝗮𝘀: Weighing recent events more heavily than earlier events. During sell-offs, the “recent performance” stinks! 4. 𝗢𝘃𝗲𝗿𝗿𝗲𝗮𝗰𝘁𝗶𝗼𝗻 𝗮𝗻𝗱 𝗔𝘃𝗮𝗶𝗹𝗮𝗯𝗶𝗹𝗶𝘁𝘆 𝗕𝗶𝗮𝘀: Similar to Recency, you’ll react too strongly to the currently available information. 𝗧𝗵𝗲 𝗳𝗼𝘂𝗿 𝗺𝗼𝘀𝘁 𝗱𝗮𝗻𝗴𝗲𝗿𝗼𝘂𝘀 𝘄𝗼𝗿𝗱𝘀 𝗶𝗻 𝗶𝗻𝘃𝗲𝘀𝘁𝗶𝗻𝗴 So now, I’m going show you the actual entries in this journal. Every time things get scary, I collect articles, emails and “prophetic statements from pundits.” And whenever things get scary, I can just remind myself that 𝘵𝘩𝘪𝘴 𝘵𝘰𝘰 𝘴𝘩𝘢𝘭𝘭 𝘱𝘢𝘴𝘴. (I’ll also share the time stamp and how the market has performed since the entry.) For the first entry, you remember the refrain 𝘛𝘩𝘪𝘴 𝘛𝘪𝘮𝘦 𝘐𝘵’𝘴 𝘋𝘪𝘧𝘧𝘦𝘳𝘦𝘯𝘵. This was frequently referenced after the Global Financial Crisis. After all, the leverage. The mortgages. The credit derivatives. In fact, there was an entire book addressing this called, This Time It’s Different. https://lnkd.in/g4Me-urY

You gotta stop caving to recency bias. It's a pretty simple concept: You make decisions purely on what happens now versus what has happened historically. As a result? When new events happen, you're tempted to change course immediately as a result. And doing so can cause you to make decisions that contradict what you committed to. For example: - You make new investment decisions based on what happened the last week versus the last decade - You judge a teams performance based recent lost game than their record overall - You judge a product based on the most recent bad review despite it having mostly good reviews Now to be clear, this doesn't mean it's never true. But blatantly disregarding historical fact? It can be a recipe for bad mistakes. When it comes to investing, don't make that mistake. When you have a long term plan, stick long term. Don't make short term impulse on them.