3 Mental Traps Investors Must Avoid

Investing success, like life, is mostly all mental.

Famed self-help guru Tony Robbins says that success in any venture is 80% psychology and 20% strategy.

In a recent interview with CNBC, the best-selling author, motivational speaker and performance-enhancing icon characterized one key element that’s crucial to success:

What we really have to do is get ourselves to follow through. And the reason why most people don’t follow through is because their psychology is messed up. How do you change your psychology? I don’t mean be positive; I mean be smart.

For Robbins, being smart means avoiding what he calls "mental traps."

I like this concept. It’s a good way to visualize, and hopefully avoid, some of our more-common destructive tendencies.

So, what are these mental traps … how do we avoid them … and how do we apply them to investing?

Image Source: Wikipedia

Discourse on these mental traps is one of the main subjects of Robbins’ new book, "Unshakeable."

Robbins says most of our challenges in life are born from inaccurate recollections and false beliefs. These challenges are symptoms of three mental traps: confirmation bias, recency bias and loss aversion.

Now, when I first read this, it struck a chord. That’s because confirmation bias is one of our biggest problems. Not only for humans in general, but specifically for investors.

When I say confirmation bias, I am referring to the common practice we all engage in to some extent. That is, the seeking out of information that fits our pre-conceived ideas about a given subject.

  So, if you’re bullish about the market and you think stocks will go up, you tend to read and focus on bullish articles or listen to bullish gurus who support your position.

  Conversely, if you’re a bear and you think a crash is always right around the corner, then you listen to and subscribe to publications that confirm the view you already hold.

Just look at the state of politics today. You can see plenty of examples where folks gravitate to people, ideas and sites that they can easily identify with … and avoid the rest.

For investors, confirmation bias can lead to very poor results.

Case in point is everyone who ever listened to a bear market forecaster from 2009 to the present. If you avoided stocks in the eight years since the March 2009 bottom, you missed out on nearly tripling your money.

The S&P 500 Total Return Index is up 312% since 2009.

I know a man who ran a successful financial newsletter. He used to tell his subscribers that when they were in stocks, they should only read stories that were bullish on stocks … and ignore stories that contradicted their position.

Now that is explicit confirmation bias in action!

I think the only way we can get better in life is to do what Tony Robbins outlined. That is, we must ask ourselves challenging questions about our assumptions, and seek out opinions that disagree with our own.

It’s only when we confront the other side of an issue that we can be sure our side is right, or that we can be persuaded that it’s wrong.


Another mental trap to avoid, says Robbins, is recency bias.

This is the mistake that many people make in thinking that the way things are now is the way they are always going to be. So, if you see the market go up, up, up the way it has since Election Day, you get shocked that it was down more than 1% in Tuesday trade.

When it comes to investing, all change is constant. That means you must be adaptable to current conditions on the ground … and be able to ride out the ebbs and flows that always occur in markets.

One thing we know from history is that markets go up, and markets go down. Bull markets are followed by bear markets, and vice versa. The key is not to get so married to thinking one will last forever …  because it won’t.

Related story: Mind Control is the Key to Great Investing


The final mental trap to avoid also should be very familiar to investors. And it is loss aversion.

The basic premise here is that we tend to remember profoundly negative experiences much more vividly and easily than positive experiences. That means we remember our big losing trades much more than we remember our big wins.

So, to avoid those stinging losses, we sometimes avoid taking action that we suspect can make us money.

The way around this is, as I see it, to realize that not all trades or investments will be winners. Yet that doesn’t mean all will be crushing losses. And, if you manage your downside in any one investment in a rational way, you can largely avoid the really big money mistakes.


Speaking of managing downside, oil just broke its uptrend. And today, Sean Brodrick is looking at what that might mean for the S&P 500 …

Mining for Money

Oil Says: Big Drop Ahead!
By Sean Brodrick

Most investors hope this market correction ends sooner rather than later. I hope that, too.

Now brace yourself for some bad news: Oil price action is telling us not to get our hopes up. Not at all.

You’ll remember on March 17, I posted a chart of the Dow Transports. That index was screaming a warning cry that all was not right with the market.

Then, on Tuesday, the Transports’ warning came true as the major indices went into "Sell! Sell! Sell" mode. Pretty much everything but utilities and gold miners fell out of bed. Hard.

You can see an updated chart of the Transports’ dire warning HERE. It still looks terrible. The bearish trend is getting stronger.

Now, the price of West Texas Intermediate Crude is chiming in. And many investors will wish the Texans kept their big yaps shut!

WTI crude is the American oil benchmark. It’s what markets use to track U.S. oil prices.

Related Story: Could a Byproduct of the Agricultural Industry Replace Oil?

Thanks to some wheeling and dealing by the Saudis, OPEC and other foreign producers managed to put a lid on production and a floor under oil prices early last year. That agreement was reinforced at the end of 2016.

But U.S. shale oil producers aren’t part of that agreement. And recently, rising U.S. production caused oil prices to fall off a cliff.


You’ll see I’ve indicated what may be a "bear flag" on the chart. We won’t know until it resolves. But there’s a saying on Wall Street: "Flags fly at half-mast." In other words, the downward move in oil may only be half-done.

Mind you, outside events can flip the whole picture for oil overnight. It’s a very volatile commodity.

So how does oil relate to the S&P 500? Well, it turns out that corrections in oil often proceed corrections in the broader market.

Take a gander …


On top, I track the performance of oil. On the bottom is the performance of the S&P 500.

Sure enough, big moves up or down in oil are often followed by the big stock index. That’s not too surprising. Energy stocks are a big part of the S&P 500.

Now look how oil just broke its uptrend. Will the S&P 500 do the same? That would be a heck of a move. About 10% lower!

Sure, charts are an art — not a science. Just because a chart gives a warning doesn’t mean it must come true. If that were so, all chartists would be billionaires.

But there’s enough of a coinkydink that investors might want to pay heed to oil. And pray that crude finds its footing sooner rather than later.

Because otherwise oil is warning: "Look out below!"


I want to know what you think, so if you have a comment or question about today’s Afternoon Edition topic, or any of the topics we cover, let me know. All you have to do is leave me a comment on our website or send me an e-mail.


The Dow dropped for the fifth day in a row, weighed down by Nike’s (NKE) 7% post-earnings drop.

It was the opposite for precious metals. Gold gained for the fifth-straight day, closing at $1,251. And silver miner and streamer Silver Wheaton (SLW) added 7.5% after its earnings report.

Otherwise, the market action was uneventful after yesterday’s drubbing. The broader S&P 500 Index gained 0.2% in front of tomorrow’s Trumpcare vote in the House.

• Will smaller weddings impact gold-buying season?: Financial services firm Tata Capital found that only a quarter of women in India want a big, expensive wedding … and that the older the bride, the less she wants to spend. But don’t look for that to hurt gold during the late-year wedding season. The survey notes that in India, the world’s largest consumer of gold jewelry, "both males and females realize the importance of spending on jewelry."

• Norway now the happiest country: Our Nordic neighbors topped the Sustainable Development Solutions Network’s "World Happiness Report 2017." Denmark fell to No. 2, while the U.S. fell one spot to 14. The six factors that determine the rankings are per capita GDP, healthy life expectancy, freedom, generosity, social support and absence of government/business corruption.

• Where will the tourists go instead? Tourism Economics, which predicts/measures government and private-industry travel, forecasts we’ll see 4.3 million fewer international visitors in 2017. The Wayne, Pa.-based group says that could mean $7.4 billion in lost revenue, and 62,000 fewer jobs, this year.

• No more Pepsi in Philly, for now: With the city’s new tax on sweetened drinks, PepsiCo (PEP) plans to offer its product in smaller, more-affordable sizes. In the meantime, it will remove 12-packs and 2-liter bottles from stores. Shares gained 0.2%.

Good luck and happy investing,

Brad Hoppmann
Uncommon Wisdom Daily

Your thoughts on “3 Mental Traps Investors Must Avoid”

  1. I tend to agree…looks like oil is headed down much further. Might need a small additional rebound first.

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