Stop. Think. Invest. summary

With that in mind, let’s start with the steps of looking for new ideas and researching businesses. There’s no lack of options when it comes to investing. In fact, there are way too many out there to really consider them all. This is why the first investment tip is about how, sometimes, less is more. 

Some of the more traditional economic theories suggest that the more choices consumers have, the better off they are. But this isn’t necessarily the case. It’s not hard to reach a point where an abundance of choices can lead to what behavioral scientists call the paradox of choice. Basically, this is what happens when there are so many options that it becomes virtually impossible to make a decision.

It should go without saying that research requires thinking. But did you know there’s more than one way to think? As it turns out, there are two different ways: System 1 and System 2 thinking. System 1 is the passive thinking you can do when you’re deep-scrolling on your phone, looking for something to watch on Netflix, or pushing your shopping cart down the aisles of a store while listening to a podcast. System 1 is kind of like autopilot thinking.

System 2, on the other hand, requires more concentration. This is the thinking that demands your full attention. You can’t multitask when you’re engaged in System 2 thinking. That would be like trying to check your Instagram feed while navigating your car through downtown city traffic at night during a rainstorm. It wouldn’t end well. Likewise, when picking stocks and researching opportunities, you don’t want to be multitasking. You want to be fully engaged in System 2 thinking. Otherwise, you’re bound to make mistakes.

At this point, it’s probably a good time to talk about writing – or “crafting,” as Bailey calls it – an investment thesis. Doesn’t that sound fun? OK, that was a rhetorical question. Nevertheless, this is a bit of work that will pay dividends in the long run.

Crafting an investment thesis simply involves writing down your reason for picking the stock you decided upon. What made you choose this stock? What are your expectations? This is the time to exercise your rationality and lack of bias. Be clear and practical, and don’t let inside views or bold forecasts skew your judgment. Make sure you’ve gotten multiple perspectives and aren’t giving too much weight to unlikely events – or too little weight to likely events.

Let’s say you’ve done your research, written your thesis, consulted with the committee, and – without any further procrastination – made your initial purchase. Now what?

Well, now it’s time to monitor and analyze the early results. But beware: this part of the process is also full of pitfalls related to human behavior. 

As a wise man named Kenny Rogers once said, “You gotta know when to hold ’em, and know when to fold ’em.” Knowing that holding your stocks can be riddled with behavioral pitfalls and misleading noise is important. But there are also things to be aware of when it comes to knowing when to fold ’em. 

Let’s take a trip in the wayback machine to that first story about General Electric stock. A scenario where a stock was taking a dive – and a lot of people needlessly went down with it.