Edward de Bono: Why Some Investors Lose Money

Edward de Bono: Why Some Investors Lose Money

If you want to invest smarter, you have to think smarter. In my previous post, I talked Thinking Hats about how Edward de Bono, a Maltese physician, prolific author, and business consultant, reinvented thinking paradigms, updating them from anachronistic models inherited from the Renaissance. In de Bono’s The Six Thinking Hats, he presents six different ways to sharpen your thinking.

I want to review the first thinking hat, the White Hat, using chess analogies to make the idea clear.

White Hat thinking helps you decide whether the information you are reviewing is relevant and accurate. It also helps you stay aware of information as it changes. And since we don’t live in a static world, this is a useful skill to master.

In a game of chess, it’s important to understand the development of the pieces on the board. If, for instance, your opponent used a Sokolsky opening, you have to decide if it is developing into a Birmingham Gambit, an Outflank Variation, or a Schuhler Gambit. Your game will be much better if you can understand what is happening on the board. Then, as the information changes, act accordingly. When Grandmaster Anand made a mistake in a recent chess match, he stopped playing aggressively and focused on frustrating his opponent. As a result of White Hat thinking, he managed a draw.

When it comes to investing, you also must keep track of information as it changes. For instance, if you buy an Initial Public Offer (IPO) from a company with an outstanding track record, after a few months you may find that the stock isn’t performing as expected. While you may not be able to discern the market forces behind this change, you must decide on your next move. Like Anand, you may have to stop playing aggressively, change your strategy, and go for a draw rather than hoping for things to spontaneously correct. When White Hat data changes, you need to learn more about what is happening and rethink your strategy.

Keep Your Hat on and Wits about You

Anand noticed when things were working against him and acted accordingly. He changed strategies. Similarly, investors need to review their investments’ performance to make sure that their current strategy is still effective. White Hat thinking allows you to act on facts, established facts, and emerging facts. Investors who skip White Hat thinking may lose money.

There are five more ideas in this six step series; be sure to sign up for our blog to get the rest of the series delivered straight to your inbox.

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