Investing is a lifelong experience and adventure, and sometimes a nightmare. Academic intelligence does not guarantee success. In fact, rote-learning and ivy league MBAs mostly lead to a decision by numbers or an aggregation of numbers and spreadsheets.
By looking at how people make the most common decision-making mistakes in investing, we can know and understand better what makes good decision-making in investments. As I am still thinking through this, the list is not exhaustive:
All the economic and financial indicators point to an unsustainable trade deficit and consumption pattern. Where did Buffet go wrong? Timing. Timing is everything, they say. Although you may not be doing it perfectly, you try to get as close as possible, not a few years off, because even a year off the mark will ruin some careers.
Arriving at the right academic solution is having the "right thing to do" lever at your disposal. That in itself is insufficient for making a correct financial investing decision. What Buffet lacked is knowing the "trigger factors".
There are many investing situations every day, every week, every month... we cannot make a decision on every issue. We can only bet according to what we know best. Even if we know Alphabet is overpriced, we may not short because we do not know what the "trigger factors" will be for its correction.
Having the opinion that Alphabet is overvalued may be an academic conclusion, I might act on that if I have a few "trigger factors" appearing in the horizon... it could be: "valuation of Nasdaq tech sector has jumped 25% over the last 3 weeks"; or "there has been a sharp increase in insiders (senior execs) of tech stocks selling over the last 2 weeks"; etc...
So, beware of what is written and said by experts, a buy may be a buy, and a sell may be a sell, but prices would not move in the "correct" direction if the trigger factors are not apparent. An undervalued stock will remain undervalued and not budge unless there are trigger factors.... jumps in liquidity, corporate exercise, insider share movements, jumps in coverage, jumps in volume, etc... Making a decision based on academic conclusions alone is a half-baked financial bet. Make sure you have the "trigger factors" covered.
2) Expert talk (Anchor & adjust mechanism) - Many experts will say the same BS over and over again. Analysts, strategists and especially economists will come up with figures to justify their conclusions and opinions.
Mainly, the figures are based on "anchor & adjust" decision making and not really sound in most cases. If you ask an expert what Bank of America's share price will be the end of the year - the expert will take current price and adjust upwards or downwards according to what he knows (banking outlook, company strategy, etc...).
The problem with anchor & adjust mechanism is that you can only take in a finite number of variables. In any projection, we will take in 3 or 5 variables, sometimes even less. Whereas in reality, most actually require 20 or 30 variables, some experts may not even be able to note the 3 or 4 crucial variables in their estimation.
A&A methodology automatically rules out "out of range volatility", they are not able to cater to that. For example if the GDP growth of Country A was 3.5% in 2015, an expert cannot readily commit to projecting 9.5% for GDP growth in 2016 - the variables under his justification table is not there to support such a hypothesis.
Plus you will stand out like a sore thumb. That is also why if 100 economists predict the growth of US economy - I would not care about the weighted average but I would be very interested to know the two extremes' prediction and their arguments. The consensus is BS, only the ridiculed is worth noting.
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