Omission Bias Cost Me $500k

Because of a mistake I made, my investment portfolio looks like this:

Picture of my investment portfolio, which is a dumpster fire.
Recent screenshot of my investment portfolio.

But hey, it could be worse.

It may get worse.

But I know one thing:

I won’t be making the same mistake again.

Because, as the saying goes, those who can’t learn from their mistakes are doomed to have to write another blog post about their idiocy when they repeat it.

And my hope is that you, by learning vicariously through my experience, can learn to avoid making the same mistake in the first place. Or at least make it less often.

Because it’s not just a mistake people often make in investing. I’m sure you make it in all other areas of life, too. And the cost can be more significant than that of some meaningless, materialistic Lambo. This mistake can turn your priceless life into a poor, regret-filled, bore-fest.

So here’s what happened.

Lucky Start

It all started with me making the opposite of a mistake in 2014.

After my pretirement tour, I put two-thirds of my savings into index funds and a third into stocks like Google, Amazon, and Apple.

Pie chart of my 2014 investments
Rough pie chart of my 2014 investment portfolio allocation.

Then in 2017, after selling my shares of the hostel I co-founded, I did the same but with Shopify.

Pie chart of Canadian stocks in 2017
Pie chart of my Canadian dollar portfolio after selling my shares of the hostel I co-founded.

As Jack Bogle continues to remind us from up in heaven, such stock picking’s for dart-throwing monkeys.

But I couldn’t help myself.

These companies were all the rage in my wannabe online entrepreneur circles. But they didn’t seem to get nearly as much hype in the less-early and later-majority worlds that, for example, my parents and their friends live in. I believed it was just a matter of time. And when that time came, I’d sell my shares to my parents’ friends’ investment advisors.

Technology adoption curve I used for my rough investment assessment
The full extent of my stock-picking analysis in a peanut-brained nutshell.

So, like a monkey, I threw my darts at those stocks.

And I got lucky.

Over the years, they multiplied in price…

…until COVID hit.

From one day to the next, it was as if all these wonderful companies had woken up with faces covered with pimples and ugly haircuts. And Investors reacted like the companies had been scarred forever.

I didn’t get it.

I figured they’d recover eventually. If anything, they’d be hotter than ever.

So in March 2020, I doubled down. I sold half of my index funds and bought more companies that were the cat’s meow in my circles but not yet so with the mainstream. PayPal, Cloudflare, and Lululemon, for example. And Carnival Cruises, because it was in the gutter being spit on by everybody.

2020 investment portfolio pie chart

More finger-in-the-air dart throws.

And, as it turns out, for the most part, more luck for me.

Crazy luck.

Way sooner than I thought, these companies got early-2000s reality TV popular. Like Paris Hilton popular.

Paris Hilton "That's hot." gif

Prices went berserk.

I couldn’t believe my luck.

I thought they were cool companies. But this cool? And this soon?

It didn’t make sense.

Omission Bias Punches Me in the Portfolio

Then, last September, I sat at a cafe and overheard high school bros at one table and grandmas at another table bragging about getting a piece of these companies. That’s when I felt pretty confident that things had blown way out of proportion.

These companies’ stocks were more popular than their products!

Which is when I made my mistake.

I succumbed to what I’m making this video to warn you about:

Wildly uneducated and risky stock picking?

No.

Omission bias.

Omission bias is our tendency to favor inaction over action.

In my example, that meant favoring twiddling my thumbs over sticking to my plan, trusting my gut, and selling my now popular-in-the-mainstream stocks.

Twiddling thumbs
Thumb twiddling: a classic symptom of omission bias.

What Causes Omission Bias?

The first reason is obvious: It’s easier to do nothing than something.

That’s why my lazy brain settled on convenient excuses, like capital gains taxes and not knowing what to do with my money instead, to justify my inaction.

The second reason is more interesting: Shortsighted regret avoidance.

Say you take an action:

  • You quit your job to start a business.
  • You get married/divorced.
  • You buy or sell a stock.

If things go wrong, you’ll regret taking that action more than if you had done nothing and things had ended up equally bad.

So, since we’re all regret-o-phobes we’re biased toward avoiding taking action.

But here’s why that becomes a problem:

In the long run, it’s the opposite.1The experience of regret: what, when, and why, by Gilovich T, Medvec VH. You regret inaction more than action. A lot more. Because your self-justifying brain will find ways to excuse your mistaken actions.

You brain's ego soothing your identity with self-justification.
Trust your ego to coddle your identity with self-justification when you take action.

But if you don’t take action, your brain instead will wistfully wonder what might have been.

Which is exactly my case.

It nags at me that I let omission bias stop me from sticking to my plan, my principles, and my gut and taking action.

Omission Bias vs. Hindsight

Obviously, I’m saying this is all in hindsight.

If the bubble was still blowing for my stocks, I’d probably be cheersing those bragging bros and gloating grandmas at the cafe and definitely not writing this post.

But here’s the thing:

If the bubble was still blowing and I had overcome omission bias to take action and sell my stocks, of course I’d regret losing out on those gains in the short run. But in the long run, my regrets would be manageable. Because my brain would find ways to justify my actions and move on.

That’s the reality-bending beauty of being commission biased rather than omission biased.

It’s not about being right more often, making more money, or burning it on Lambos. It’s about defaulting to taking action rather than sticking to the status quo, even if doing so sometimes backfires.

My Plan to Fight Omission Bias

To avoid repeating the same mistake, I’m starting something enriching that I’ve been doing in my personal life for almost seven years, but for some reason never got around to doing for my investing:

Writing out my thoughts.

That includes starting this site, How I’m Investing, and writing posts like this.

Doing so helps me sort through my thoughts and filter out the ones that are idiotic on closer inspection, so I can come up with solid action plans. Then after acting, I can review the results versus expectations, and learn from them.

Maybe most importantly, documenting opens up an undistortable line of communication between my current self and my future selves. That way, I can hold myself accountable for not being omission-biased.

Note to self: Be commission biased, you moron. Default to taking action.

Hopefully this way Future Me won’t have to write more posts about his costly bias-driven mistakes.

Speaking of which, if you’re curious to follow what else I’m doing to minimize mistakes and hopefully earn back my lost ambos—no wait, that’s anchoring bias!—subscribe to my How I’m Investing newsletter.

Just do it.

Don’t be omission biased.


Watch the Video

Even though it’s the exact same as the post, the extra visuals may hammer home the point so you behave with less omission bias.

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