the psychology of successful trading

Mergers and Acquisitions In The Wine Sector

Defining Mergers and Acquisitions

Mergers and Acquisitions occur when the operations of two companies are combined such that subsequently, all of the operations of both companies are subsumed under a single holding company.

What is the difference between a merger and acquisition

One difference between a merger and an acquisition in lay terms relates to the relative size of the companies involved. If two companies of similar revenues combine, they are said to have merged. If a company combines with another company and the first company has a significantly larger amount of revenue than the second company, then the first company is said to have acquired the second company.

Formally, a true merger is where the companies cease to exist (new company shareholders get new shares). An acquisition is where both companies continue to exist as entities but the target becomes the sub of the other. It’s not really about the relative strength / revenue of the companies. Maybe in practice you will rarely find true mergers between companies who have vastly different revenues but that’s a statement about a practical matter not a “definition” of a merger vs an acquisition

Why do companies do Mergers and Acquisitions?

Obtain synergies — there may be opportunities to reduce overall costs by e.g. eliminating duplicated capacities at the two headquarters; obtaining bulk discounts on supplies; eliminating headcount in operations; combining IT systems.

Increase negotiating power — the merged entity will be a larger player in all its operations and may be able to drive a harder bargain with suppliers, landlords, distributors, finance providers or retailers.The general aim of M&A activity is to produce a strengthened combined operation. This may be targeted in various ways, as outlined below.

Expand capacity — the merged entity will have a broader portfolio of capabilities or opportunities: the acquiring entity may gain e.g. vineyards/ grapes/locations that it previously lacked; a state-of-the-art IT system.  It will also gain a broad and well-designed distribution network.  It could benefit from politically advantageous connections in an emerging market.

Conduct financial engineering — often, acquisition targets will be under- geared. This means that they fund their operations more with equity than with debt. This is inefficient because dividends payable to shareholders are not tax deductible whereas interest payments on debt are by contrast tax-deductible. This angle is often of interest to private equity players.

Enable investment — often target companies have lacked sufficient cashflow to develop and enhance their operations and the acquiring company can supply this to allow the combined company to fully exploit its opportunities. Again, this angle is often interesting to private equity.

Add expertise — an acquisition will also afford an opportunity to attract best-in-class management talent and employees at all levels together with improvements in training and staff development.

Brief overview of an example Acquisition

Duckhorn Wine Company

The history of Duckhorn is a good example of how private equity activity has shaped the sector.

Duckhorn is based in Napa with 243Ha of vineyard estates in California and in Washington State; it had been family-owned and run since inception in 1976.

In 2007, it was acquired by GI Partners, a middle-market private equity fund originally aimed at providing investment diversification to major Californian pension funds. The purchase price was $300m.

GI worked on developing the management team during its ownership, both via external hires and internal promotions. Also, the product lineup was expanded, with the additional focus on the Decoy brand causing it to become “one of the industry’s top luxury wineries.” GI also invested more than $60 million in Duckhorn during their ownership. This money was used to:

  • Add 140Ha of vines, allowing a significant expansion of production under both existing brands and new ones;
  • Create state-of-the-art winemaking facilities via construction and acquisition;
  • Introduce Canvasback, a boutique Cabernet Sauvignon from Washington State’s acclaimed Red Mountain;
  • Expand distribution to a wider base of customers locally and internationally;
  • Achieve significant industry recognition: Duckhorn now has what is recognised as the premier US luxury wine portfolio.

GI exited the investment in 2016 by selling Duckhorn for $750m to TSG Consumer, another private equity firm focussed on opportunities in the branded consumer sector. Given the initial purchase price of $300m and the stated investment of $60m, this represented an attractive IRR of 9.1% for GI assuming that the $60m of investment was distributed equally over the eight non-initial and non-final years of ownership.

How this Acquisition Changed the Broader Wine Industry

The profitable nature of this investment for GI underlined the appeal of this sector to private equity investors more generally, as shown by the subsequent exit to a different private equity house.

It also showed that the opportunities to create value in the sector by adding investment and expertise were genuinely achievable in a relatively straightforward fashion.

Consequently, the deal increased the value of a restricted number of ultra-luxury US wine operations and brands while emphasising the importance of some scarce qualities such as quality vineyards in key locations and a brand portfolio which is ripe for expansion. That means not fully exploited yet also it was helpful for the purposes of the acquisition that Duckhorn had significant high-end brand identity and wide awareness among high-involvement consumers and specialist industry players.

The deal showed management teams that private equity could be an appropriate steward of assets, adding value while not impeding the expression of core values and creating rather than destroying employment. Finance of appropriate quantum and patience was shown to be available.

Duckhorn ended its period under GI ownership with greatly expanded distribution in all US states and in 50 countries on five continents. This showed the sector how distribution could be positively impacted under private equity ownership and investment.

Further Transactions Stimulated by the Duckhorn Acquisition

The transaction stimulated further transactions in the US luxury wine sector.

In 2018, Duckhorn (still under the ownership of TSG) acquired Kosta Browne Winery from a Boston-based private equity firm JW Childs Associates. Thus Duckhorn has now become almost a private equity payer in its own right in the wine industry.

The President of Duckhorn Alex Ryan observed that “you can’t market your way out of a lower category into a higher one” which indicates that one motivating factor for the transaction was to expand product availability without dilution of brand identity. It has been noted elsewhere that it is possible but very difficult to improve brand identity — Symington’s has been attempting to move its Cockburn’s Port brand upmarket through significant and extended investment.

The stated aim of the transaction was to operate Kosta Browne as a separate unit but expand it via both organic growth and acquisitions, thus further underlining the likely future importance of M&A in the sector.

Ryan noted the importance of private equity in the wine sector, stating that it was “good to have scalable, professional investment coming in to the space” which illustrated “maturation.”

We can therefore for all of these reasons expect private equity involvement in the wine sector to continue to be of major and growing importance.

Comments on Likely Further Private Equity Involvement in the Wine Sector

A banker involved in the sector commented as follows on the likely effects of further private equity involvement on the sector.

  • Further consolidation between companies already involved in the sector
  • More focus on capital appreciation under private equity than “lifestyle” under family ownership
  • Consequent higher level of focus on expansion of businesses
  • Higher production of existing brands — which may require broader distribution which in turn may increase compliance issues within the US three-tier market and internationally
  • Expanded portfolio of brands with concomitant additional expenditure incurred in marketing, market research, segmentation analysis and advertising
  • Interest in the question as to whether the successful strategy shown in the GI transaction is scalable viz. can the Duckhorn approach be replicated successfully at Kosta Browne? Are there saturation effects at the luxury end of the market?
  • Are there opportunities at the value end of the market? Or are these already fully exploited by the major conglomerates? We may assume they have been running their businesses at maximum efficiency and with no lack of investment capital and management expertise.
  • Continuing high multiples will be paid for established luxury wine assets which are now sought after by private equity as well as already established family owners and individual wealth family offices. This business is attractive since it is tangible, easy-to-understand and recession-proof, with potentially some lack of correlation to financial markets more generally.
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Logistics of Selling #Wine From #Lebanon


Lebanon; no GI; vineyards are at some distance from the winery for historical reasons (founder was unsure of the future borders of Lebanon and so the winery is in Beirut while the grapes are grown more than 60km away)

This has the disadvantage that the grapes must be transported a considerable distance under conditions of some heat; however, there are good supplies of inexpensive labour available and it is possible to harvest in the early morning

Against that, the location of the winery in a major city means there is good availability of skilled labour where it is required

Red grapes are grown in the Bekaa valley

White grapes are grown in the foothills of the Anti-Lebanon mountains and on the seaward side of Mount Lebanon

Grape varieties

Cabernet Sauvignon, Carignan and Cinsault (red); Obaideh and Merwah (white)

Styles of wines and price point

Premium: the house has a very strong historical reputation built up since its foundation in the 1930s. The reds may be seen as competing with Bordeaux which means that they can be quite expensive when compared to the median bottle sold and yet relatively inexpensive when compared to classified growths. The house has been carefully expanding its range while aiming to maintain brand identity which would suffer from any decline in quality. The white and rosé production of the house is much less well-known than the flagship red blend, but wine critics have described this as an unfortunate situation. There is therefore an opportunity here.

Notable viticultural/vinification practices, climactic factors or location details that may be used in the marketing of wines.

Vinification practices: there are no specific vilification practices which are unique to the house but the marketing will nevertheless note that care is taken throughout as one would expect from a premium product. All wines are made “naturally” on a minimum interventionist basis. Grape growing achieved organic certification in 2006. The wines ferment in concrete with some time in French oak (nevers) and are released after a generous seven years of maturation.

Climatic factors: The vineyards are located at 34N which would normally be too warm for viniculture; the altitude of the vineyards is 1000m which offsets this. The marketing can note this as an unusual though not unique quality factor/differentiator.

Location: The house is not the sole wine producer in Lebanon, but it is clearly the most well-known and has by far the best reputation. This forms the underpinning of the marketing. Many consumers at high and moderate levels of expertise are interested in trying wines from new locations and new grapes. The reds are without doubt the highest quality wines made in Lebanon or indeed the middle east region while the fact that they are basically made from a Bordeaux blend means that they can combine quality and a new experience without being too radical a departure from established premium benchmarks. The whites benefit from the novel location details and are made from two grapes both of which are likely to be unfamiliar to even quite experienced consumers. The “brand story” of the wine is extremely strong, being unusual and interesting. For example, the cellars of the house were used as air raid shelters during the civil war in Lebanon between 1975 and 1990 and there was no interruption in wine making during hostilities. The general location has an extraordinary long history of winemaking which may potentially be traced back to the Phoenicians in ca. 4500 BCE.

Specific social, economic, political or legislative factors that would impede/assist the sale of wine

As a general remark, it should be noted that the wine will be primarily sold overseas. While Lebanon has been up until very recently a relatively wealthy country, it has experienced a sovereign debt default in 2020 for the first time in its history. It has also been a relatively liberal country given its location, but it should still be noted that Muslims make up more than 2/3 of its population and that group consumes less alcohol than other groups. Given these factors, the social, economic, political and legislative factors obtaining in the international arena are of more significance to the fortunes of the house.

Social factors

No current discussion of social factors can omit the effects of COVID19. While there is no very stringent lockdown in place in Lebanon at present, this could occur at any moment if infection rates become elevated. Such a lockdown would present a significant threat if it took place around the harvest; while agricultural workers in general would be exempt, it is quite conceivably that harvesting of grapes for wine production would be deemed non-essential in the unique circumstances of Lebanon. Similarly, the house relies on transportation via sea from Beirut port. Loading ships is a labour intensive operation but also is highly computerised and containerised. The house is therefore relatively optimistic that there are reasonably chances of being able to maintain shipments. Failing that, it would be appropriate to develop financial buffers to weather any income interruptions; the increased average maturity of wine that would be available post-crisis would be valuable and can be used as a negotiating point in seeking interim credit facilities from banks.

Economic factors

Similarly, the international economic situation in all key markets is dominated by the COVID19 shutdown, which is predicted to cause GDP declines of 30% or more in Q22020 and which count potentially continue into Q3 and beyond. The position of wine as a product which is extremely important to many consumers but nevertheless not actually essential is a difficult one. There are no ways for the house to mitigate this; it can only be observed as above that the markets will return and the house will be ready with product when they return. Given the global nature of the crisis, there are no clear new markets to explore. However, since the crisis appears to be closest to resolution in China, and there is a burgeoning middle class there which is anxious to display its status and wealth, this could be an opportune moment to focus marketing efforts in China. This could further benefit from the 2012 prohibition on “lavish gifting” promulgated by Xi Jinping. That severely affected sales of super-premium wines such as premier cru classé Bordeaux; there could be an opportunity for the house to benefit given its niche as a premium wine in a similar style which is nevertheless perhaps more “under the radar” as far as official perceptions of excessive luxury are concerned. Such an effort would need to be conducted with a high level of discretion and local expertise.
Away from COVID19, the international economy has been under strain in any case for some time. The aftermath of the global financial crisis had in some ways not ceased: interest rates were historically very low prior to the onset of the virus crisis and the US expansion was becoming very long. Economic conditions could therefore have been expected to turn negative in the next couple of years in any case. The house will rely on its strong reputation built up since 1930 to see it though this crisis and note that there could be further opportunities later since some producers will not survive this downturn.


Given the many international markets in which the house sells wine, there are not really any specific factors to note. However, Lebanese politics is a source of major instability and this could easily give rise to problems for the house. The political structure is unique — some might say uniquely unstable — with a sectarian basis for political appointments. There are three major religious groups in Lebanon (Shia, Sunni and Christian) and the top three political positions are divided accordingly. However, population numbers have changed significantly since the epoch when this arrangement was made. Young people who are highly educated had been protesting the poor economic performance of Lebanon, the concomitant unemployment and the widespread corruption. The recent debt default is likely to result in what is known as a “doom loop” between the sovereign and local banks. This places the house in an exposed position in terms of being a highly visible generator of cashflow which is not in a position to relocate. Any threat to the stability of the local banking sector can be generally mitigated by placing funds overseas, but this presents problems in funding the ongoing operations of the house. All of these factors could present the house with difficulties sever enough to prevent or impede production or sale of wine.

Lebanon has historically had good relations with most countries and has accordingly not suffered a great deal from trade embargoes or tariffs. There appear to be fair prospects of this continuing. There are slightly strained relations with Saudi Arabia but this country is not a customer for the house in any case. A resolution of the conflict in Syria appears to be in prospect and this would eliminate a major local source of instability.


There have been no local legislative threats, but in the context described above, it is clear that the government is desperate for funds. Its very survival was threatened by an ill-judged attempt to place a tax on WhatsApp messaging; the house could present a much easier target for taxation and other informal methods by which officials seek funding.

The house has historically sold a great deal of wine into France, partly because of the long shared history between the two nations. This has somewhat been impeded by the advent of the Lot Evin, which in 1991 greatly reduced the allowed advertising of alcohol. Nevertheless, the house has a strong enough reputation which continues to spread by word of mouth and expert opinion and so has suffered less than it might have done as a result of this factor.

Restrictions on social media are less in evidence currently so this represents an important opportunity to address new consumers. It would be valuable to explore engaging an appropriate celebrity/online influencer. Such an individual must fit with the high quality brand image and add brand awareness in a way which reaches likely new customers. These will need to be relatively affluent groups so some research on where high-earning Millennials are allocating their social media attention will be useful.

Costs associated with getting wine to the specific market: packaging, transportation, importation, sales and marketing

In general, costs within Lebanon are relatively modest since inexpensive labour is widely available.

Packaging: costs are relatively high since the house is a premium brand. Sales actually generated in Lebanon at the cellar door are important and require premium packaging. This consists of branded padded boxes and other branded accoutrements. These high costs are more than offset by the sales revenue however, since the premium nature of the house allows it to command high prices especially for older vintages.

Transportation: the winery is actually located adjacent to the major seaport of Beirut and so wine can be despatched there by road with no difficulty or expense. The house is fortunate in that its location in the eastern Mediterranean allows the easy transport by ship to many significant markets such as France, Italy and the UK. The US is more of a challenge, but again since the house is producing premium high priced product, air freight is an option.

The major issue is that the 60km from the vineyard to the winery is time-consuming given the quality of local infrastructure, but this is a fact of life rather than an addressable cost issue.

Importation: costs are in-line with market conditions generally. It must be observed that the climate globally has moved in a protectionist direction, partly as a result of the advent of the Trump admininstration and the subsequent US-China trade war. The election due in Nov-20 may ease this situation if the incumbent is not reelected. Brexit continues to be an event with extremely unclear outcomes; however the signature of a continuity trade deal between Lebanon and the UK in Sep-19 offers some reassurance that no new tariffs will be imposed in what is a major market for the house.

Sales: costs are in-line with market conditions generally. The cellar door operation is relatively expensive in that there are no charges currently made and free samples of vintages going back to 1974 are made available. However, in a group of 12-15 attendees, on average 3-5 will make purchases. Since these can be in the range of $1,000 to $2,000 — bearing in mind that most attendees will have travelled from Europe to attend the cellar door — this activity is highly viable economically.

Marketing: costs have been historically relatively modest because the house has been able to rely on its reputation. However, given the extremely challenging environment described above, this is likely to change. The engagement of a celebrity/influencer will be extremely expensive because of the requirements of the role. The house continues to incur expenditure on items such as branded corkscrews but it is unclear how rewarding this is.

Is selling wine in the assigned market a valuable business proposition?

Overall, despite the extreme challenges presented by the current environment, there are good prospects that the house will be in a position to continue to thrive. It is even conceivable that the difficulties of the situation will be offset by some positive factors. These include the possibility that houses in lockdown will consume more wine. The affordability will increase because restaurants are closed. This means that consumers will be buying the wine with a typical retail mark-up (ca. 20%) rather than a typical HoReCa mark-up (ca. 66%). It can also be expected that the end of lockdown will be greeted with enthusiasm by customers; wine can be expected to play a major part in the celebrations that will doubtless follow. The house can consider now how it can position itself to take advantage of this factor alongside champagne producers, who can be expected to take the lion’s share of such post-crisis celebratory revenues.

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Omission Bias and Financial Markets

Omission Bias is the tendency to favour the omission of an act over its commission.  It is widely studied in psychology and has been reliably replicated in a variety of scenarios.  In the context of financial markets, this can have adverse effects because there is no practical difference between investing $100 in a stock that declines 10% the next day and failing to buy one that appreciates 10% the next day.

This of course assumes that you actually have $100.  If you don’t have a float of cash available at all times, then you will not be in a position to seize opportunities.  So that would be the first piece of advice.  Maintain a certain percentage of your investable assets in the form of cash —  perhaps 10%.  Alternatively, you could arrange for a line of credit in a similar amount but make sure you do not do too much of this because it is high risk.  Conversely, holding 10% cash acts to reduce risk.

Another adverse effect of Omission Bias is that it impairs your ability to assess performance.  This is of crucial importance.  Many investors do not have clear enough data of what has worked for them and what has not.  It is essential to have a good focus on this for a number of reasons.  

One benefit is that you can only manage your portfolio appropriately if you have been examining its performance precisely.  A second benefit is that you might be able to identify some specific sorts of trade that you are particularly good at.  You can then seek to identify relevantly similar situations and exploit them.  Also — you might have a chance of avoiding disasters from the past occurring again!

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Our ability to look at our failures and learn from them is also impeded by our natural distaste for thinking about the unpleasant — but failures are always more instructive than successes.  One might almost say that any fool can succeed — but only an expert can fail well…

A major practical impediment to any attempts to correct for Omission Bias is due to the sheer scale of the problem.  The number of shares you did not buy yesterday is absolutely huge.  There is no way you can think about all of those.  Nor should you.  The more useful comparison is to think about the shares you could have bought or the ones you almost did buy.  So that tells us that you should be looking at several buy options at a time.  Look at what factors led you to choose the one you did choose.  

Maybe you were looking at three oil companies.  You compared them on price/earnings ratios, dividends and price/book value.  You made a choice.  Did that work out?  (Don’t do this next day.  Wait for a reasonable period.  Otherwise you will just be looking at noise.)

What fundamentally is going on with Omission Bias is a sort of agency effect.  If something bad happens and you could have prevented it but did not, this is seen as morally less culpable than if you did something which caused a bad outcome.  After all, “you didn’t do anything.”  I think this perception might be strengthened by the fact that the law says a lot about what we cannot do but rarely says anything about what you must do.  You are at liberty to walk past a baby drowning in a pond.  You are not at liberty to throw a baby in a pond.

This might be fine morally.  But stock markets are not outlets for moral action.  They are locations where you can profit.  Or not.  Bear in mind the possibilities of Omission Bias affecting your judgements of your own decision-making and your decisions will get better and more profitable.

Learn more in the video below:

the psychology of successful trading

Au Pied de Cochon, Montreal

This is a quite spectacular world-class restaurant which somehow combines new world informality with a completely unique focus on quality. Nothing could express more fully, intensely and joyfully the spirit of its home. If Michelin came here, it would definitely get a star. The question of whether it got two would depend on whether they said “but this is not Paris.” Of course, we don’t want it to be Paris. We want it to be Quebec. On that basis, it would get two stars. (You don’t want three. That means six staff standing behind you at all times and a “cathedral of food” atmosphere. Here it would presumably be three ice hockey players and some big dogs pulling a sled full of ice wine, which would be less disturbing…but that’s not the ideal approach…)

The evening began with a couple of Canadian wines which were the only part of the evening which was less than stellar. These one would have put in the category of “I am glad I tried some Canadian wine but there is more development time needed.” Both lacked a little structure and depth. However, this was instantly forgotten when our amazingly friendly and informed maitre’d, Sam, brought out a Canadian white which could stand up to competition from anywhere.

This was the Stratus 2014 White from VQA Niagara Lakeshore from winemaker J-L Groux. Chardonnay-led, it had an extraordinarily satisfying viscosity without losing punch and sharpness. This turned out to be because of an unusual combination of grapes. The list was headed by Chardonnay at 52% but was then followed by a significant 32% Sauvignon Blanc component. There were further floral notes added by minor but important elements of Semillon, Viognier and Gewürztraminer.

Then to the food. You can order from the menu, but why not let the experts do their thing? Sam offered to just bring us stuff and we agreed.

Poutine is a legendary Canadian dish made up of fries, curd cheese and gravy. In snowy climates, one needs fat, salt and sugar and this dish does that and does nothing else. The version at Au Pied de Cochon however, is the Rolls Royce variant, because it adds their signature element of hot foie gras. This combines a light crust with an intensely flavoured liquid interior and matches perfectly the underlying poutine elements. Naturally, the fries were cooked in duck fat. And the punch through of the Sauvignon-assisted Chardonnay was clear in a wine very well chosen by Sam.

This was combined with a quite extraordinary salad which had citrusy zing, apple, walnuts, cabbage and blue cheese. A very arresting combination which managed to be intense but also very light so as to offer some good contrast with the poutine. There was also a very intense mushroom dish to round this section off.

For the main courses, Sam brought us items we would never have ordered, which was another reason to let him make the choices to both showcase the items of the day and match them with each other and the wine. There was a pig’s trotter from which the meat has been extracted, braised and reinserted coated in breadcrumbs. This was accompanied by a mushroom/tomato/herb led sauce of great depth and intensity. We drank a Burgundy with it which was superb but I am not going to say anything about it because we’ve all had good Burgundy. Though note that Jancis says 80% of Burgundy is disappointing and this wasn’t…

We then realised we had not had one of the signatures: Duck in a Can. We were told that this would need another 32 minutes but that was fine. In fact, leisurely pacing of courses was perfectly done throughout the evening. Rushing a sequence of what are after all some very rich foods would be a terrible mistake.

This duly arrived and was spectacular in a fatty yet well-contrasted manner. Again it had elements of depth added to it by foie gras which was perfectly placed in the context of the dish.

And the final wine of the evening was really remarkable. I had a lot of trouble answering the challenge from Sam as to whether it was New World or Old World because it was extraordinarily complex and interesting yet came in a. screw cap. (I have nothing against screw caps, it’s just it almost always tends to be a New World method. And this wine drank like it had centuries of experience behind it.)

Here is what I wrote about this wine:

Le Cigare Volant Central Coast CA 2012 Mourvèdre/Grenache/Syrah/Cinsault nose: dark cherries, vanilla and a quite extraordinary amount of smoke. Plus forest floor/mushroom (on advice!). Palate: again remarkable yet well integrated smoke reminiscent of a high end Pauillac.  Strong but balanced acidity, fruit back in the mix somewhat so well aged.  Very subtle tannins. Quality: outstanding — great balance, length, intensity and complexity 18.5 

A massive wine like that needs massive food to complement it and this was there.

Further highlights: some insanely deep Italian spirits, some dark shots, amazing pecan pie with caramel ice cream, and the world’s only dessert with foie gras. (It worked.)

The wine list runs to six pages (Burgundy, French Red, French White, World Red, World White) and is brilliantly chosen but if you have a great Sommelier like Sam you can just let him decide and read the list for fun.

In sum: one of the best restaurants in the world yet totally informal. This place is only about the food. It doesn’t care about the inessential. It isn’t even that expensive. Being anywhere in North America and not coming here is a mistake. Actually, being on the planet and not coming here is a mistake. Vive le Québec.

the psychology of successful trading

LGC Coin Comment Confirmation Emails

The above file is the receipt provided by Margret C.

And below is the photo provided by Margret C.


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Plan Continuation Bias In Financial Markets

What is Plan Continuation Bias?

Plan Continuation Bias is a major factor driving investor losses in stock and other financial markets.  For example, many investors tend to hold on to losers for too long when they should cut their losses.  In this article, I will outline how this bias permeates our psychology by looking at how it works in air crashes, and then go on to examine its effects in financial markets. Investors will learn how to address this bias and improve trading performance.

Plan Continuation Bias, simply put, is the tendency we all have to continue on the path we have already chosen or fallen into without rigorously checking whether that is still the best idea or even advisable at all. Operating with this bias, as with the other 180+ biases that are an unavoidable feature of our psychology, is generally a good idea. We simply don’t have the time to constantly re-analyse our decisions.

Plan Continuation Bias in Plane Crashes

Berman and Dismukes wrote a NASA report on this problem, which they describe in a brief article. They define Plan Continuation Bias as follows:

a deep-rooted tendency of individuals to continue their original plan of action even when changing circumstances require a new plan

Berman and Dismukes “Pressing the Approach” Aviation Safety World, December 2006, pp. 28–33

The authors describe two air crashes which were in their view caused by the operation of Plan Continuation Bias. Flight 1420 into Little Rock, Arkansas crashed in June 1999 because the pilots ignored alarms and persisted with an approach in difficult weather conditions. Similarly, Flight 1455 crashed in March 2000 in Burbank, California because the pilots continued with an approach even though they knew that they were flying at 182 knots which they knew was 40 knots above the target touchdown speed.

It is very easy for us to sit here on the ground and do armchair flying. We would not have made these errors we say to ourselves, wrongly. If we saw that we were flying too fast or that there were multiple alarms sounding, we would abort the landing and go around. This is not difficult to do. This quick and wrong simulation of the pilots misses out many germane factors. The pilots are under some pressure to land planes quickly and efficiently for cost reasons. There are no guarantees that going around will improve weather conditions. But ultimately, the major factor in these crashes in human cognitive bias.

Plan Continuation Bias has significant effects on the psychology of all of us. As the authors observe,

Our analysis suggests that almost all experienced pilots operating in the same environment in which the accident crews were operating, and knowing only what the accident crews knew at each moment of the flight, would be vulnerable to making similar decisions and errors

Berman and Dismukes “Pressing the Approach” Aviation Safety World, December 2006, pp. 28–33

Effects in Financial Markets

Plan Continuation Bias is just as relevant a factor in making decisions in financial markets. We can be just as liable as the pilots described above to sticking to the plan. We bought a stock, it was a good idea at the time, and we continue to hold it even though the original reasons for it being a buy have dissipated or not transpired.

In trading, while no one is going to be killed, it is still an environment in which decisions need to be made on an inadequate data set and sometimes under time pressure. It is also going to be a highly charged situation emotionally. The inadequate data set could result from factors such as the impossibility of predicting the future or the sheer scale of the operations of a listed company. Time pressure is particularly prevalent in day trading, but even more long-term investors are susceptible to effects such as feeling that “money is burning a hole in their pocket” and they need to put a trade on right now. The emotional charge comes from losing money. We are all highly averse to losses — in fact, we seem to be 2.5x more averse to losing money than we favour gaining the same amount. It hurts to lose. It challenges our self-perception.

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How To Prevent Plan Continuation Bias From Impeding Your Stock Market Performance

  • Try to minimise the effects of an inadequate data set by either doing more research or not trading unless you are certain or can set downside limits. Don’t take trades where it looks like you need to know everything about a company or where you think other market participants can easily know more than you. Avoid trading assets you don’t understand like Bitcoin.
  • Don’t do anything under time pressure. You will need to get used to FOMO because “just getting one more trade on” will kill you quite quickly. It’s fine to miss things. It is much more important to get a small number of decisions right than to try to catch every opportunity
  • Don’t trade when feeling strong emotions and try to trade emotionlessly. This is hard to do. It is particularly hard to learn this from practice/dummy accounts. It simply doesn’t hurt very much to lose play money. You should still start here, but be prepared for real life to be much harder. Get more Zen about it. It doesn’t matter if a trade loses as long as you are up over the year.
  • Learn more in the video below:

Asking Mark Field MP To #StopBrexit

From: Tim Short
Sent: 17 November 2018 10:45
To: FIELD, Mark
Subject: Brexit Is Economically Catastrophic

To The Rt Hon Mark Field MP

Dear Mr Field,

I would like to know as a constituent of yours and an investment banker what actions you are taking to prevent the severe adverse economic consequences of Brexit, which were extremely clear at the time of the referendum, and yet are becoming more apparent daily.

As you will be aware, we cannot replace the many FTAs we currently enjoy in virtue of our EU membership quickly or easily. It is a chimera to believe that trade with the Commonwealth can replace trade with the EU since it is an empirical law that trade volumes anti-correlate with distance.

There are three components of GDP growth, of which an increased workforce — meaning migration — is one. Increasing the other two — productivity and capital intensity — is difficult. We therefore require greatly increased levels of skilled migration, especially in the light of likely future demographic developments. Migration is harmed by Brexit since it creates a strong and accurate perception abroad of UK hostility to migration.

There is as you will know a composite sector model of the UK economy on the day before the referendum composed of the appropriate weightings of sectors in other OECD economies. Naturally, those other OECD economies have been exposed to the same global economic environment as has the UK economy. Nevertheless, UK GDP is currently underperforming the composite model by £500m per week.

I have never understood what it was that the Brexit voters wanted, but whatever it is, we simply cannot afford it.

I look forward to hearing what actions you intend to take to stop Brexit.

Yours faithfully,

Tim Short

psychology the psychology of successful trading Trading trading psychology

More Data Explaining Why #Women Are Better #Traders Than Men

Warwick University Business School (“WUBS”) have conducted a fascinating study on the investment performance of men and women.  They show that women perform significantly better with a good sample size and temporal range.  They make some interesting remarks on why this might be.  I think I can add some extra psychological depth to this — so we can see that female traders appear to have some quite deep natural advantages and they should feel encouraged about managing their own investments.

What WUBS did was collaborate with the share dealing service offered by Barclays Bank.  They looked at 2800 investors over three years.  There are various ways of measuring stock market performance, but one of the most common is to compare the performance of a portfolio with a relevant stock market index.  (I explain what a stock market index is here: What Is A #Bear #Market?)

It is quite hard to outperform an index consistently.  This fact is what lies behind the recent strong growth of tracker funds.  You may as well buy the index if you can’t beat it.  The results from the WUBS study showed that women consistently outperformed the FTSE-100 index and men did not.  The male investors returned 0.14% above the index which is basically statistically consistent with having performed equivalently to it.  However, I suspect that these investors would have been better off just buying the index rather than paying a lot of trading fees to obtain the same performance.

The female investors outperformed the FTSE-100 by a massive 1.80%.  This may not sound much, but it is actually huge.  Done over a lengthy period, it would lead to significantly improved results.  Let us assume that the FTSE-100 returns 5% a year.  If you started with £10,000 and performed as the male investors do, you would end up with £45,000 after 30 years.  (It is always important to think long term in the stock market; to prefigure part of the answers I will discuss below, the women seem to understand this.)  The female investors would turn £10,000 into £72,000 over the same 30 year period.  That is a huge improvement over £45,000 and bear in mind that the female investors have taken the same risk, making it even more impressive.  (One caveat is in order here: no one performs this consistently over the long-term–if they say they do, it is a huge red flag.  Remember Madoff?  But the point stands.)

How are female investors outperforming?

WUBS and Barclays set out a few reasons which could explain the outperformance.  One of them is the one we already know about.  Women are less over-confident than men.  I explain how that works here: Women Are Better Traders Than Men.  In summary, women tend less often to think that their new idea is brilliant and then abandon their previous idea before it has had time to work.  Men on the other hand just get extremely convinced about their new sure-fire idea and go with it.  Interestingly, women’s lack of over-confidence is not manifested in what they say about their beliefs.  They just don’t act on them as often.  We could discuss philosophically what that means about our account of belief — but the key point is that women are less likely to trade in deleterious ways!

But there are new reasons suggested.  There are three that I think are especially interesting.

  • Women stay away from terrible ideas like #Bitcoin (this explanation is proposed by a Guardian commentary from Patrick Collinson; see links below)
  • Women avoid “lottery style” trading
    • It has always struck me as insanity to own a lot of penny stocks which are supposed to return ten times the amount you invest in a year because this almost never happens.  As I discuss in my book, The Psychology of Successful Trading, traders can get seduced by vivid stories, incorrectly over-estimating massively their likelihood of coming about.  A far better approach is just to sit still in major stocks for a long time, with maybe some spicy options for fun in a minor section of the portfolio.  The problem with picking the next Amazon (or Bitcoin, for that matter) is that you can’t.  You would have to own a million penny stocks for each Amazon or Apple.  So this strategy is exciting but completely unsuccessful.
  • Men hold on to their losers
    • It seems that women are better at getting out of something which hasn’t worked.  This came very close to home for me.  Infamously, I am still holding Deutsche Bank stock, partly because I recommended it in my book as a contrarian trade.  Banks are supposed to trade at at least book value (in fact, 2.0x before the crisis).  So if you buy a bank at 0.25x book value, you can’t lose right?  Because it is buying something for a quarter of its value.  That hasn’t worked for me yet — maybe a female trader would have got out of this position a long time ago.

In conclusion, we have seen some deep-seated psychological advantages which female traders will have over male ones.  This should encourage women in their investing.




I would like to thank Dr M R Hampson for suggesting I look at this.


the psychology of successful trading

#TheAffair And #Nietzsche’s Perspectivism

I will argue that The Affair is a philosophically interesting piece of TV drama which raises deep questions in the areas of memory and our access to “the truth.” Some of these may be understood by reference to Nietzsche’s account of truth (and some of them relate to interpretations of quantum mechanics!) There are no significant spoilers and no references to events beyond the first episode.

The aspect of The Affair that is most immediately apparent is that it is told from multiple perspectives. This is made dramatically arresting by the way it becomes clear that the different perspectives are incoherent with each other — and probably with themselves. In this, the situation parallels real life.

Moreover, the cinematography seems to reflect this. Noah’s view seem somewhat brighter literally and metaphorically. Alison seems more beautiful, which partly perhaps reflects the way she smiles more in his section and could also mean that he perceives her as being more beautiful than she perceives herself to be. It is also a reflection of her affective state, presumably. There are interesting feminist points to be made here also about the male vs the female perspective.

I will focus on a single tiny episode and note the multiple readings. As a preliminary, I should point out that the story at this point is being told in flashback from a subsequent police interview.

The episode in question is when Noah is approaching up the driveway of Alison’s house while she is having sex with her husband in the driveway. The sex is rather aggressive and it is unclear to Noah whether an assault is taking place. The precise event I wish to discuss is that in Noah’s version, Alison shakes her head. Noah appears to interpret this as meaning “no, this is not an assault.”

The head shake does not appear in Alison’s version. There are at least seven readings of this.

  1. Noah remembers it because it happened but Alison does not remember it.
  2. Noah remembers it falsely and Alison does not remember it because it does not happen.
  3. Noah does not remember it because it did not happen but is reporting it to the police for reasons of his own.
  4. Something happened which Noah remembers as a head shake but which Alison remembers as something else.
  5. Noah remembers the head shake correctly but Alison has forgotten it.
  6. Both Noah and Alison remember the head shake correctly but Alison has omitted to mention it because it does not seem important to her.
  7. Both Noah and Alison remember the head shake correctly but Alison has deliberately not reported it for reasons of her own.

I hope it will serve as an indication of the dramatic quality of this production that this amount of consideration needs to go in to a single micro-event!

How does this relate to Nietzsche?

The starting point of Nietzsche’s doctrine of Perspectivism holds that we need to take multiple perspectives to approach the truth. In a way, it is post-modern in that it denies there is any one truth. There are only truths from a perspective. Put another way, since god is dead, there is no omniscient unbiased perspective from which there could be a single truth.

This does not mean Nietzsche is a nihilist or someone who thinks there can be no better or worse ways of proceeding. He instead claims that the optimal approach is one that adopts multiple perspectives. He then adds a couple of typically radical Nietzschean riders which really give the position a strong flavour.

Many philosophers would proceed thus far and then say “but it is important to avoid contradictions.” Not only does Nietzsche not do this, he does the exact opposite. He says that the wisest choice is to hold multiple perspectives especially when they are contradictory!

This is what I think is being brought out in The Affair with great aplomb and intelligence. I commend it to you.

(I won’t discuss the many worlds interpretation of quantum mechanics here, but I think it is also in play, not least because it is actually mentioned by Noah.)

See Also:

What Is “Theory Of Mind?”

The Psychology Of Successful Trading – Behavioural Strategies For Profitability

#Proust: An Argument For #SimulationTheory

The #Bitcoin Bubble Is Caused By The Halo Effect

the psychology of successful trading

#McDonnell’s Share Proposal Takes Assets From #Shareholders And Does Not Give Them To #Workers

I will argue that the recent McDonnell proposal on share ownership for workers does not achieve its objectives and is unfair to shareholders.

The BBC* reports the proposal as follows:

“Under Labour’s “inclusive ownership fund” proposal, Mr McDonnell said workers would be given a financial stake in their employers and more say over how companies are run.

Firms would have to put 1% of their shares into the fund every year up to a maximum of 10%.”

This is outside the usual run of taxation because it has the same effect as removal of assets from existing shareholders, since it is uncompensated.  It is also unreasonable to describe it as an inclusive ownership fund since it mostly generates cash for the government.  This is the case since there is a cap (£500 per employee) above which the dividends go to HMRC.

What Is The Proposal?

Every year, companies listed in the UK will have to put 1% of their equity in a misnamed “Inclusive Ownership Fund.”  This will continue for ten years so we can expect that after that period, 10% of the equity of all such companies will be placed in a fund.  The current situation today is that existing shareholders have a claim on the future cashflows of the company in proportion to their shareholding.  I will explain below why this will affect shareholders immediately since shares are valued on a forward-looking basis.

Right now, all the shareholders together can expect to benefit from 100% of the companies’ cashflows.  If the McDonnell proposal takes effect, they will only be in a position to expect the benefit of 90% of future cashflows, because there will be another 10% of new shares in issue.

It might be thought that the shares issued will not be new ones.  This is not the case because the proposal is unfunded.  There is no plan to compensate existing shareholders.  As will become clear when I consider objections to my account below, many of the problems with the proposal flow from its uncompensated nature.

We may safely assume that the proposal does not include compensation even though this is not stated for three reasons.  Firstly, McDonnell has a track record of proposing uncompensated asset seizures.**  Secondly, I estimate that the costs to FTSE-100 firms alone will exceed £100bn.  This is the case since there are 100 firms in the FTSE-100 of a similar size to Shell and the proposal applies to the much larger group of all companies listed in the UK.  The UK Government does not have access to sums of that nature.  Finally, it would be extraordinary to fail to mention such an aspect of the policy when discussing it since that would make it much less unjust.

It is important to note that one reason this is a problem is that the new shares will not be paid for.  This is one defence against dilution — the issuing of new shares which is detrimental to existing shareholders — under normal circumstances.  If a company issues new shares on the stock market, they are sold at market value.  The company then owns that cash, and shareholders have a claim on it.  Similarly, they have a claim on a share of anything the company does with that cash.  Ideally, it will invest it in growing its existing business or starting new ones, and everyone is happy.  

The McDonnell proposal does not involve any compensation.  So it will just be a dilution of existing shareholders by 10%.  Given the forward-looking valuation I will describe below, this means that all existing shareholders will see their share prices decline by 10% immediately.  That is why this proposal amounts to an asset confiscation.

Simon Jack, the BBC’s Business Editor, summarises the effects of this disastrous policy as follows:

“workers will not be able to buy and sell the shares – so they won’t really “own” them in a traditional sense. They will be eligible to receive dividends on the shares up to a value of £500 per worker per year. The government gets the rest.

The Labour Party reckons this will raise about £2bn a year. It could end up much more. Let’s take just one company – bumper dividend-payer Shell. Ten percent of its £12bn annual dividend comes to £1.2bn.

If each of its 6,500 UK employees got £500 each (totalling £3.25m) that leaves £1.116bn for the government. That’s just from one company – every year. Wow.”

This clearly means that calling the proposal an Inclusive Ownership Fund is a misnomer since in the case of Shell, the total cost to the company of £1,119.25m would be divided between employees, who would get £3.25m or 0.29% of the cost and the government would get £1,116m, or 99.7%.  So in fact the amounts going to employees are irrelevant.

Share Valuation

Share valuation is based on fractional ownership of a company — this is why it is called a “share.”  This means that if I own a share of a company, I am entitled to a small percentage of the value of that company.  If the company has issued ten shares and I own one of them, I own 10% of the company and I can expect to benefit from 10% of it’s future cashflows.  Note immediately that it is important to avoid what is known as “dilution.”  This, as mentioned previously, is the issuing of large numbers of new uncompensated shares.  That dilutes the claims of existing shareholders which is obviously unfair and so this area is highly regulated.  It is not legal to dilute existing shareholders; McDonnell’s proposal is dilution on a massive scale.  Again, as I mentioned above, this cannot be avoided by buying the shares on the open market unless funding is provided and there is no proposal to provide such funding.

Share valuation must also take account of the fact that shares are a claim on future cashflows.  These must be therefore be considered on a Net Present Value (“NPV”) basis, to reflect the fact that money in the future is worth less than money today.  This is because in a world of positive interest rates, it is slightly better to have money today than money in a year from now.  

For example, imagine you have £90 today and interest rates are 10%.  This means you could save the £90 for a year and at the end of a year, you would have £99.  Turning this around, we can say that the value today of £99 to be received in a year from now is £90, if interest rates are 10%.  We need to discount the values of all future payments by the amount of interest we would receive over the period between now and the time of the payment.  So clearly, payments far in the future are worth much less today than payments closer to the present.

Discounting all the future cashflows like this gets you the NPV.  A share of a company is worth the NPV of the expected future cashflows.  It has to be, because if it moves out of line with that, the market will either buy it or sell it so it moves back in line.

The reason this is a serious problem is that it means proposals to take value away from shareholders in the future cost them money today, since that is how shares are priced.

Before considering some objections to my account, I will finally mention that the effects of this policy could easily avoided by companies if they simply delisted from London.  Many large companies already have multiple listings in places other than London, such as New York or Frankfurt.  It would be wise to avoid giving them a powerful reason to delist from London, especially give the strong commercial disincentives created by Brexit.


  1. The Conservatives are in power and Brexit is a disastrous economic policy.  (This objection is aimed at showing that Labour is a better choice than the Conservatives on economic grounds.)
    1. 1.1.True, but irrelevant for two reasons.  Firstly, the fact that the alternative is dire does not make this a good policy.  Secondly, the Labour Party position is also Brexit plus this share appropriation proposal, which is worse.
  2. 1% a year for ten years is less than 10%
    1. 2.1.This is true but extremely minor as an adjusting factor.  There is some benefit to not having this policy come in in full immediately, but since shares are valued on an NPV basis, it won’t help much.
  3. The shares could be sourced from the market and so this would be fine
    1. 3.1.That would in fact be fine, because it would mean buying the shares from existing shareholders rather than causing them to be issued and diluting existing shareholders.  However, as noted above, this is not the proposal, since that proposal would require funding to be provided on an unrealistic scale.
  4. Some continental companies (e.g. Equinor/Statoil) already do this so it is fine
    1. 4.1.No, because the cost is already “in the price.”  It is fine to sell people shares on the basis that they will only get 90% of the cashflows; it is not acceptable to change a situation in which they paid to own 100% of the cashflows into one where they own only 90% without compensation.
  5. You would only “lose cashflow” if the company you owned failed to grow by more than 1% a year
    1. 5.1.False.  You lose 10% of whatever the cashflows turn out to be.  Currently you own 100% of the cashflows with growth of X and afterwards you own 90% of cashflows with growth of X.
  6. This will be compensated for by reduction in salaries
    1. 6.1.False.  Firstly, that would likely be contrary to employment law.  Secondly, the employees are only getting 0.3% of the funds in the case of Shell, so even if they do compensate for that through reduced salaries, there is no compensation for the other 99.7%.
  7. The Labour Party claims that the policy only raises £2bn a year so it will be fine
    1. 7.1.The policy raises £1bn a year just from Shell, which is just one of 100 major companies that are members of the FTSE-100.  So it looks as though this policy will raise more than £100bn a year.  Either that, or the Labour Party does not understand its own policy, which is another reason to avoid implementing it.
  8. The cost of the proposal would only relate to UK activity and so would be less than the calculated amount of e.g. £1bn for Shell.
    1. 8.1.This is not stated and the London listed shares of Shell represent a claim on the value of all global activity of Shell and all of its cashflows.  So such a proposal could not be implemented based on shares.
  9. This will not be so bad because companies can easily avoid it
    1. 9.1.True.  They can delist in London.  Why is that positive?  Should we not construct policies with some intelligence?
  10. Shareholders have been stealing from the public purse so this is fine
    1. 10.1.This objection is at least honest in that it admits that this proposal is theft.  It seeks to say that shareholders have unreasonably benefitted from the provision of public goods such as roads and an educated populace.  It would therefore require a major economic research programme to back it together with a determinate ethical view.  Neither are forthcoming.

I conclude that this is a bad policy.  Since pension funds are major shareholders, it would have major negative financial implications for current and future pensioners as well.

** See PFI: The Real Problem with “Bringing the Contracts In-House” Will be the Bonds

— where the proposal is to cancel existing contracts without compensation current holders of bonds (which we know for the same reason as above, it is unaffordable).  In addition, the proposal to renationalise water companies involves swapping equity for government bonds.  Even if done on reasonable terms, that is a compulsory change of asset class.

See Also:

John #McDonnell’s Characterisation Of #Finance Is Misconceived

Optimal #Trading #Psychology

The Psychology of Successful Trading

The Illusory Truth Effect And Financial Markets