Reflections on bad trades – the narrative fallacy or apophenia

The main challenge with sticking to the strategy of loss aversion & reversion to mean is, as Charlie Munger has said it, being able to stand there and do nothing when no trading pattern emerges for multiple days in rows.

During this period of time, restlessness creeps in and the mind becomes more susceptible to the narrative fallacy or apophenia ( seeing patterns and trajectories when none exists). Inevitably one gets tricked into nursing grandiose visions of what the future might be and while leaving the physics of reality behind…

Actual costly examples:

  • Spotify 2nd May 2018 @168 when it continue its climbs
    • net loss on the swing -USD1,016.04
  • Tesla 10th May 2018 @ USD308 when it continue its climb
    • net loss on the swing -USD5138.85
  • DocuSign 18th June 2018 @ USD65.66 when it continued its climb
    • net loss on the swing -USD6023.37
  • Dropbox 18th June 2018 @ USD42.53 when it continued its climb
    • net loss on the swing -USD928.21

Accumulative screw ups: -USD12,986.72

Had I not succumb to the siren calls of the narrative fallacy and retained my ability to sit and down nothing, I might have the opportunity to enter on the dip instead of the up.

Nevertheless all hope is not lost, the path remains clear and apparent. That is to diligently practice the craft of adhering to the script while acknowledging the psychological biases.

Ironically, the practice of investment is synonymous with the practice of mindfulness.

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