Becoming a Better Investor:  Excessive Self-Regard Tendency

Investing is within reach for everyone—and with the right mindset, it can lead to meaningful rewards. Legendary investor and longtime Berkshire Hathaway Vice Chairman, Charlie Munger, often highlighted the powerful role human psychology plays in shaping our decisions, both in everyday life and in investing. He identified 25 key psychological tendencies that influence behavior, arguing that by recognising these biases, investors can avoid common mistakes and make more thoughtful, rational choices.

This week, we’re diving into tendency number twelve: the Excessive Self-Regard Tendency, and how this can have an effect on us as investors.

What is it?

This tendency refers to creating an illusion of being right. In simple terms, it's our tendency to overestimate our own capabilities, knowledge, and judgment, even in areas where we are not as competent as we think we are. It’s a form of overconfidence that distorts our reality, making us blind to our limitations and leading us to make poor decisions. Think of it like people who enter singing reality shows convinced they will win — only to fare horribly and be shooed away by the judges.

Munger says it’s human nature. We possess a natural inclination to overestimate our abilities, intelligence, and judgment, convincing ourselves it will all work out. When we enter this zone of self-regard or overconfidence in any situation, we tend to ignore contradictory evidence, downplay possible risks, and even dismiss sound opinions and facts that challenge our view. And that is a slippery slope that can lead to disastrous outcomes.

How does it play out in the world of investing?

In investing, this bias can show up when we put too much faith on our own ideas. We research a company or sector, develop a thesis, and convince ourselves we’ve found a winner. We manage to get some good returns and lean in further to our own ideas.

Then comes the dangerous part — we stop listening. We refuse to look at facts, dismiss opposing views, and ignore potential risks. We may even become so overconfident that we ignore the market altogether, trade frequently, and make impulsive decisions, and end up losing out. And that’s what you don’t want in investing. So how can we guard against this tendency?

• Start with your why: We should document the investment thesis and what led us to invest in this particular company in the first place. Write down the potential risks, or any factors that may force you to change your mind. Go back to this thesis and review it regularly.
• Seek dissenting opinions: Criticism and opposition can be a good thing. Look for views that contradict your investment thesis. Views that challenge your ideas can help expose blind spots. If your idea can’t survive scrutiny, it may not be worth pursuing.
• Stay humble: Remember that the market is complex and unpredictable. Even the best investors make mistakes, and make them often.

Munger says, “The best antidote to folly from an excess of self-regard is to force yourself to be more objective when you are thinking about yourself, your family and friends, your property, and the value of your past and future activity. This isn’t easy to do well and won’t work perfectly, but it will work much better than simply letting psychological nature take its normal course.”

So in investment terms, be objective, focus on the facts, strip away the emotion. In the end, successful investing isn’t about always being right. It’s about being right enough, and being wise enough to admit when you’re wrong and take corrective action.