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Good morning!
Why do we make stupid investment decisions? (Link)
Stupidity is overlooking or dismissing conspicuously crucial information. Here are seven factors which can create situations where stupidity can flourish:
- Outside circle of competence
- Stress
- Rushing or urgency
- Outcome fixation
- Information overload
- Group/social cohesion
- Presence of authority
- Overconfidence/ego
- External justification
Why time horizon works? (Link)
Two things drive markets over time:
- Earnings, including dividends
- Changes in how much investors are willing to pay for those earnings (valuation multiples)
When earnings compound but changes in valuation multiples don’t, the importance of the latter to your lifetime returns diminishes over time. Which is great, because changes in valuation multiples are the most unpredictable part of investing. Assuming earnings compound over time – an assumption, but a reasonable one – here’s what happens when valuation multiples go up or down by, say, 20% in a given year:
