{"id":33403,"date":"2012-11-08T21:32:29","date_gmt":"2012-11-09T02:32:29","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/2012\/11\/investing-lessons-avoiding-the-peter-lynch-bias\/"},"modified":"2012-11-08T21:32:29","modified_gmt":"2012-11-09T02:32:29","slug":"investing-lessons-avoiding-the-peter-lynch-bias","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2012\/11\/08\/investing-lessons-avoiding-the-peter-lynch-bias\/","title":{"rendered":"Investing Lessons: Avoiding the Peter Lynch Bias"},"content":{"rendered":"

By The Sizemore Letter<\/a><\/p>\n

The single most important lesson I\u2019ve learned about being a successful investor is the need to maintain emotional detachment.\u00a0 Any feelings you may have towards a stock are unrequited.\u00a0 If you love a stock, it will not love you back.\u00a0 And if you hate a stock, it will not give you the satisfaction of responding in kind.\u00a0 (As tragic as unanswered love may be, unanswered hate is often more damaging to your pride.)<\/p>\n

A stock is like that unattainable cheerleader you had a crush on in high school.\u00a0 She neither loved you nor hated you; she was completely unaware you existed.<\/p>\n

No matter how much you love a stock (and write favorably about it in MarketWatch) it will not reward your loyalty by rising in price. And heaven help you if you allow your emotions to cloud your judgment in a short position.\u00a0 I know of no surer way of losing your investment nest egg than to short a stock or other investment you hate.\u00a0 Alas, I know from experience; I shorted the Nasdaq 100 in the fall of 2003.\u00a0 In an outbreak of moral high-horsing that has (thankfully) now been purged out of me, I decided that tech stocks were overpriced and needed to fall further.\u00a0 The Nasdaq had very different ideas, and I was forced to cover that short at a 20% loss with my tail tucked between my legs.<\/p>\n

A closely-related investment mistake is succumbing to what I call the \u201cPeter Lynch bias.\u201d<\/strong><\/p>\n

Peter Lynch ran the Fidelity Magellan fund from 1977 to 1990 and had one of the best performance records in history for a mutual fund manager\u2014an annualized return of over 29% per year.<\/p>\n

Unfortunately, he also offered some of the worst advice in history when he recommended that investors \u201cinvest in what they know.\u201d<\/p>\n

On the surface, it seems like decent enough advice.\u00a0 If you stumble across a product you like\u2014say, a particular brand of mobile phone or a new restaurant chain\u2014then it might be reasonable to assume that others will feel the same way.\u00a0 If the stock is reasonably priced, it might make a good investment opportunity.<\/p>\n

Unfortunately, \u201cinvesting in what you know\u201d tends to create muddled, emotionally baggaged thinking.\u00a0 The fact that you like Chipotle (NYSE:$<\/span>CMG<\/a>)<\/strong> burritos and are intimately aware of every ingredient used in the red salsa does not automatically make Chipotle a good investment any more than your liking of Frappuccino makes Starbucks (Nasdaq:$<\/span>SBUX<\/a>)<\/strong> a good investment.\u00a0\u00a0 Rather than give you an insightful edge, liking the product causes you to lose perspective and see only what you want to see in the stock.<\/p>\n

How do we mitigate our emotional impulses?<\/p>\n

In a prior article, I noted that \u201cbrain damage can create superior investment results<\/a>.\u201d\u00a0 But short of physically re-wiring our brains, what can we actually do?<\/p>\n

I try to follow these basic guidelines and recommend them:<\/p>\n