Early one morning, I sat at my kitchen table with a steaming coffee before me. The pleasant aroma of my steamed half-and-half and the double shot of espresso wafted into the air.
The sun was shining through the window, and a gentle breeze was blowing through the open door behind me.
I should have been in a euphoric state of bliss.
But I wasn’t.
My mind was reeling.
And my stomach was in knots.
The day before, I had made the single largest investment into one stock in my entire investing career. And right before I made the buy, I was certain about my decision. I had run the numbers, dug deep into the company, and performed ample research. I was sure this company was for me.
Moments after I made my buy, I saw an article. It had just come out about the company I now owned. So, I read it. The article wasn’t particularly bearish. Still, it did spell out a possible slowdown in the company. It also made some points about possible supply chain problems on the horizon. No problem — I had read many articles making the same claim months before. I had done the research and had already concluded that these claims were unlikely.
But all of a sudden, I had this aching and uncomfortable feeling in the pit of my stomach. I wasn’t terrified, or panicking, or even nervous — I just didn’t feel quite right. So, I decided to read a few more articles about the company. I also watched a few YouTube videos to get some more takes. Then, I checked out just a couple of tweets about the company. After all, knowledge is power.
Except, I didn’t feel more powerful. I didn’t feel more knowledgeable. I also didn’t gain a deeper conviction after hours of reading, watching, and scrolling. This is why I sat at my kitchen table the next morning. I allowed my delectable coffee to cool. The beautiful sunrise passed me by while I stared at the wall. I ruminated on the sick feeling in my stomach.
At the time, I was unaware of the specific cause of the sick feeling in my stomach. However, I was certain of one thing: I wanted it to go away.
Information Masked As Conviction
When people feel uncertain, they often crave more information. And why not — it makes sense. We tell ourselves maybe we don’t know enough, that’s why we are doubting ourselves. Maybe someone else out there has more experience, more expertise, more intelligence.
But what we really hope they have is what we truly want — more conviction.
I know, because this is exactly what I thought that sunny day with knots in my stomach. So, I turned to the internet, and I was not disappointed. I found an ocean of information. I discovered many investors with more experience. There were also droves of content creators touting exorbitant amounts of skill. Additionally, an egregious number of entertainers boasted their profound investing intelligence.
And all of this gave me a complex illusion. I believed they all had what I wanted most, which was assurance in my own decision-making.
Searching For Proof
Few people have studied Social Proof more than Robert Cialdini. He dedicated an entire chapter to the topic in his book, Influence. Cialdini and his team at Arizona State University have conducted many tests. These verify his findings. He outlined three core ideas related to Social Proof. These ideas completely changed the way I think about decision-making.
- Social Proof is most powerful when people are uncertain. They “look to the actions and behaviors of others” to decide what they should do. When I was uncertain about my investment, I went searching for “proof” that I was right.
- The principle of Social Proof states that when more people find an idea correct, it is more likely to be perceived as correct. I decided to trust people with the biggest crowd. They attracted the most likes and the most comments.
- An astounding 95% of people are imitators, and only a mere 5% are initiators. This fact illustrates that people are more influenced by the actions and behaviors of others. This is greater than any other form of proof offered. I was looking for other people to validate my “beliefs” instead of looking within myself for the answer.
Without even realizing it, my behavior was interesting. I wasn’t looking for the online noise to confirm my original investment decision. I was looking for others to confirm the noise I had read from that one article. I was looking for people to prove me wrong.
And to my own detriment…I found it.
What You See Is All There Is
Daniel Kahneman introduced the term “What You See Is All There Is.” This concept helps explain what happens to us when we search for confirmation. He explains that we quickly construct a coherent, yet inaccurate, story based on limited information. Our brain often constructs stories, looking for information that confirms our beliefs. It does this instead of looking at all the data and information without any favoritism.
This is exactly what I did. I went searching for more information about the investment decision. I was suddenly not so sure about it. I didn’t even realize it at the time. My brain was trying to prove to me that my original investment idea was false. I had spent months researching it. I miraculously had managed to convince myself that I had made the wrong investment decision without even realizing it.
This is why I never really felt conviction in my investment decisions. I looked for others to tell me my decision was correct. When I searched for empirical data to help inform my decision, I found Social Proof telling me I was wrong. My brain discovered even more information that added fuel to an already raging fire of doubt.
And that’s why the sick feeling I felt that sunny morning never really went away. I had not yet learned how to find my own conviction.
So, I sold out of my entire position.
Process Quiets The Noise
I used to think that more information and more knowledge meant I would have conviction. I also suffered from the common illusion that conviction was a state of mind. That I would manage to will my way to conviction. I suffered from the common misnomer that conviction was how long I was capable of withstanding the pain. I believed it was about watching a stock I owned fall through the floor. I thought I had to “endure” the pain.
But that’s not how conviction really works. If I had conviction, I wouldn’t have felt the need to read an article. It was about the stock I had just purchased. Conviction is born from developing a process and sticking with that process through. This sounds so simple, and yet very few investors ever do this. There are many reasons for this, but for me, it was two reasons in particular that prevented me from developing and sticking with a process for years:
- Simply obeying a “process” sounded too easy. (The noise of online “experts” convinced me they knew something I didn’t)
- Sticking to a process for years on end does not feel smart. (It feels like cheating, taking a shortcut, and just simply being lazy)
But these feelings were all misguided beliefs I had built up in my head. And they led me to make poor investment decisions. The stock I sold proceeded to triple in value over the next two years. I got distracted by the noise. I fell prey to Social Proof. I allowed myself to become disillusioned by Confirmation Bias. These actions led me to walk away from an investment. That decision cost me tens of thousands of dollars.
I now only invest by using a system. But it costs me a lot of unnecessary stress. It also costs me agonizing anxiety and an exorbitant amount of money to figure that out.
I’m building a small, serious course. It covers how to find and value stocks (businesses). You will learn to deeply understand and confidently own them without relying on noise or stock tips.
I’m inviting a small first group before opening it more broadly.
If this way of thinking resonates with you, you can join the early list here.
