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At the 2002 Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) annual meeting, Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio) took the time to respond to a question about how they keep each other in check. Specifically, they were asked about how they limit confirmation bias - i.e., the tendency to seek out information that supports your prior conclusions and to discount data that does not. Here is what the legendary duo had to say on the subject.
Keep track of yourself
Obviously, having a partner like Buffett or Munger to bounce ideas off of is an incredible rarity, but it can be helpful to get a second opinion on your calls from almost anyone else. Often a new set of eyes is all that is required to see the truth. Buffett went on to say:
Buffett went on to say that having feedback mechanisms is a good way of keeping oneself in check. For himself, he finds that having an annual report to compile every year helps to clarify his thinking and provide a backstop against a slide into confirmation bias. Not everyone can or needs to compile an annual report, but every investor should consider keeping an honest record of their own efforts. A daily journal is a good way to do this - write down every investment decision you make the moment you make it, making sure to take note of your mental state and your thought process at that point in time.
Doing so provides two big benefits. First, it prevents your brain from creating after-the-fact rationalizations for why you bought a stock. If you have a written record of why you did something, it is a lot harder to fool yourself into thinking that you had other reasons. Second, a written record can help to uncover damaging patterns that you may be falling into. Perhaps you are prone to making hasty decisions when you are upset by a loss. Or maybe you risk too much of your capital per trade, which makes it difficult for you to stay emotional about your investments. Everyone has their cognitive blind spots, and there is no shame in making mistakes. The only shame is not learning from them.