Whitney Tilson's Tips to Applying Behavioral Finance

1) Be humble.

–Avoid leverage, diversify, minimize trading.

2) Be patient.

–Don’t try to get rich quick.

–A watched stock never rises.

–Tune out the noise.

–Make sure time is on your side (stocks instead of options; no leverage).

3) Get a partner – someone you really trust – even if not at your firm. 

4) Have written checklists; e.g., my four questions: 

–Is this within my circle of competence?

–Is it a good business?

–Do I like management? (Operators, capital allocators, integrity).

–Is the stock incredibly cheap? Am I trembling with greed?

5) Actively seek out contrary opinions.

–Try to rebut rather than confirm hypotheses; seek out contrary viewpoints; assign someone to taking the opposing position or invite bearish analyst to give presentation (Pzena’s method).

–Use secret ballots.

–Ask "What would cause me to change my mind?"

6) Don’t anchor on historical information/perceptions/stock prices.

–Keep an open mind.

–Update your initial estimate of intrinsic value.

–Erase historical prices from your mind; don’t fall into the "I missed it" trap — think in terms of enterprise value, not stock price.

–Set buy and sell targets.

7) Admit and learn from mistakes — but learn the right lessons and don’t obsess.

–Put the initial investment thesis in writing so you can refer back to it.

–Sell your mistakes and move on; you don’t have to make it back the same way you lost it.

–But be careful of panicking and selling at the bottom.

8) Don’t get fooled by randomness.

9) Understand and profit from regression to the mean.

10) Mental tricks.

–Pretend like you don’t own it (Steinhardt going to cash).

–Sell a little bit and sleep on it (Einhorn).