Afford Anything - The 5 Ways Investors Behave When Things Go Wrong, with Clare Flynn Levy

Episode Date: May 22, 2026

#717: Clare Flynn Levy was a hedge fund manager in London in the summer of 2007, watching her trading screens turn red — every single day. Merger arbitrage spreads were widening. Investors were pulling out. She didn't yet realize she was watching the early tremors of a global financial crisis. Clare joins us to talk about what that experience taught her about investor behavior, emotional bias, and the hidden forces that drive financial decisions. She now runs a firm that helps professional fund managers analyze their own decision-making patterns. Her core argument: most investors aren't making rational choices. They're rationalizing them. We get into two specific biases that cloud judgment — sunk cost fallacy and the endowment effect — and how they show up whether you're picking individual stocks or rebalancing a 529 plan. Clare shares a personal example. After the 2024 election, she moved her kids' college funds from equities into bonds, recorded her reasoning in her calendar, and came back nine months later to review it honestly. She was wrong. Equities kept climbing. But having a written thesis let her make a clean new decision rather than doubling down out of ego. We also walk through five investor archetypes drawn from behavioral research on fund managers. Connoisseurs let winners run. Raiders take profits too early. Rabbits freeze — or keep buying into a losing position. Hunters wait and take calculated shots. Assassins cut losses cleanly, without emotion. Most people default to rabbit behavior when things go south. The goal is to be an assassin. Clare's practical rule: don't let any single position drag your overall portfolio down more than 1 percent before forcing yourself to reassess. Her closing advice for long-term investors: ask yourself five simple questions before every major move, write down your reasoning, and go back and check. Timestamps: Note: Timestamps will vary on individual listening devices based on dynamic advertising run times. The provided timestamps are approximate and may be several minutes off due to changing ad lengths. (00:00) 5 Ways Investors Behave When Things Go Wrong (05:20) Clare Flynn Levy — hedge fund manager turned behavioral finance analyst (06:50) 2008 crisis — watching screens turn red daily (08:25) Sunk cost fallacy and the endowment effect — why investors hold losers too long (10:25) Index funds — riskier than most people think (17:09) Tech concentration — how indexes got warped (27:52) Algorithmic trading — machines changing the game (29:37) Playing the wrong game — taking cues from short-term traders (31:22) Individual stocks — same behavioral traps apply (35:22) Hit rate vs. payoff ratio — what actually drives returns (44:57) Five investor archetypes — how you behave when winning and losing (50:17) Alpha decay — when to exit a winning position (54:22) Being an assassin — rules for cutting losses without emotion (59:42) Decision journaling — five questions to ask before every move (01:03:22) Quarterly snapshots — simple way to track your own patterns (01:05:22) Closing advice — discipline, patience, and realistic expectations Learn more about your ad choices. Visit podcastchoices.com/adchoices

Today we're going to talk about the psychology behind investing decisions. What are the biases that can wreck your returns, even when you think that you're being rational? We'll discuss five archetypes that describe how investors behave when things are going well and when things are falling apart, because you probably fit one of these descriptions without even knowing it. Welcome to the Afford Anything podcast, the show that knows you can afford anything, not everything. This show covers five pillars. Financial Psychology, increasing your income. Investing, Real Estate and Entrepreneurship, acronym Double I Fire. Today's episode is about that letter F, financial psychology. It's also about the letter I investing.

Our guest is Claire Flynn Levy. She was a hedge fund manager and later became the CEO and founder of Essentia Analytics. It is a fintech company that uses behavioral data analytics to help investors and capital allocators make better decisions. It's a company that sits at the intersection of behavioral finance and data science. She is a CFA and she's a graduate of Phillips Exeter Academy, Barnard, and the London School of Economics. And through our conversation, you'll discover that being a good investor isn't about being right. It's about knowing what to do when you're wrong. With that said, here is Claire Flynn Levy. Hi, Claire. Hi. Thank you for joining us. It is a pleasure to be here.

Claire, you were a fund manager in 2008. Tell us about that. Yes. If I plotted my lifeline as a graph, that would have been a very dramatic and volatile time. But I was working at a hedge fund in London at the time. And we had to deal with the early signs of the financial crisis without realizing that that's what it was. But we had some investors who there was a merger arbitrage strategy that we had just started. I wasn't running that personally, but we had just started running. Merger arbitrage is about like a company takes over another company or says they're going to take over another company in the public markets and the prices adjust immediately. But there's some gap between the price that the acquirer has said they're going to pay and the actual share price today because there's always a risk this might not happen. And so the merger arbitrage hedge funds will play that and take a bet on, is it going to happen or is it not? And the spreads there, that measure of the risk, between the current share price of the stock and the price that the bidder has said they're going

to buy it for, started to widen and widen. And it was like, hmm, that's not good. That meant that people's conviction level that deals were going to go through was going down. And that caused a bunch of our investors to start pulling their money out. This was in the summer of 2007. So before all of that really kicked off in earnest, for me, that whole time, it started much, earlier and by the point that Lehman went down and the thick of it, we had already been living through a very stressful period. And at that point, I think that probably the biggest takeaway for me out of all of it was that relationships are the thing, the decision-making factor that nobody budgets for in these situations. So today I'm in the business of doing analytics

for fund managers and we talk a lot about cutting losses and should you do when things go wrong? And in this case, everything was red. Like the whole screen was read every day and it was like the world is going crazy, what is happening here. And there was, there were multiple cases of, do I pull my money out of this, in this case, broker? So you had all these different brokers that you were dealing with and that you had cash balances with, but it started to look like some of them might go bust, you know, which Lehman, Bear Stearns, these all actually started to happen and it made you wonder, gosh, I'm with Goldman Sachs, Morgan Stanley, should I be moving my cash somewhere safer? But if you do that, you're going to ruin your

relationship with that person. And they're telling you that to your face right now, do not move your money. You are going to ruin your, we will never do business with you again. There are a bunch of situations like that where you really realize the relationship factor that is part of the equation, actually when you're making an investment decision, sometimes, not always. I see it also with my fund manager clients who, you know, they get really invested in a particular story, a particular management team. They get to know, they do so much research. And this would be the same if you were investing in any private company. You get to know the management team. You do all this research. It becomes really hard to then cut and run, you know, take your money out and leave because you've invested emotionally in this relationship. Is that because of sunk cost fallacy? Is that the emotional pull? I mean, I think that's part of it often. So when you think about times that I don't know if this has ever happened to you, but it certainly happened to me.

You throw good money after bad. You can convince yourself that you're doing it for mathematically sound reasons and that the positive story is going to come off. And it may well, you might be right about that. But you've got the potential of being influenced by the fact that you've already put money in. That's your sunk cost bias. You've also got the endowment. effect, which is about overvaluing something because it's yours.

So it might be that I'm very close to the management team. I know more than everybody else. And therefore, I know this thing is going to be, you know, it's going to make me money. Or it could be, well, I have sentimental value. I don't want to get rid of my, you know, whatever, car, any object, because it's worth more than that guy's willing to pay for it. And it's like, no, actually, it's worth more to you. My mother had this.

My parents recently downsized in their early 80s, and they moved from a big house on the water in Maine down to an independent living community in Connecticut and had to downsize from a very large house to a very small apartment and did not get rid of enough stuff. So note to self when that's me, don't err on the side of keeping too much stuff because it is very oppressive for the first few months you live in your new environment.

But my mother was so convinced that her stuff was worth more than giving it away or even selling it. It was like, they won't appreciate it the way that I appreciate it. It's like, that's true. That's true. And that's why you will never get money for that, but you can keep it. Yeah, you do develop sentimental attachments to anything you own, whether it's a piece of furniture or sometimes a stock. Yes, absolutely. it's a relationship. An investment is a relationship, just like a relationship with a person

as a relationship. You enter into it, well, hopefully in the case of a stock or a fund, not blindly, you've done some research, you know why you're buying that thing. You then go on a journey and it's not up in a straight line. It might feel like that if you relationship is within VINVIDIA, but for most stocks, it's not how it works. And so, you go on a journey and you have to be able to see the writing on the wall clearly down the road, which is really hard to do. People have a way of not noticing when the cracks start forming. And then all of a sudden it becomes evident they need to get out of this relationship when things are like really obviously wrong.

And it's, yeah, you can convince yourself to stay with it, to stay with it. And you will have other influences that would be guiding you to stay with it. not least not wanting to look stupid. There's a fear of looking stupid, a fear of a future regret that plays into it as well, I think, that like, you know, if I abandon this thing or if I admit that I was wrong, that's going to be worse than just hanging in there and hoping for the best when on average, that's not actually what goes on. Things have a way of going up and then coming down. With regard to that hanging on too long, that tendency to hold on to a bad investment for longer than you should, there are two different ways that we can drive this conversation. One is in the context of individual stocks and the other is in the context of index funds.

And I actually want to, I want to ask about both. Let's actually start with index funds since the majority of people listening, the majority of their portfolio, their non-real estate portfolio, maybe 80 to 90 percent, is. is going to be an index funds. When you're thinking through these big asset classes, how do you take some of these lessons around the endowment effect, around sunk cost bias, around not wanting to look stupid? How do you take that and meld it with your self-awareness around your decision-making around your portfolio? The answer is to be very disciplined in your decision-making,

which is not a lot of fun necessarily. Like, that's the thing. I think hopefully your listeners, the fact that they're listening to you in the first place means that they're somewhat discipline because they're actually asking questions about financial independence and how do I afford what I want to afford

and set goals for myself. So you're already a step ahead if you're doing that because most people don't want to put in the work that's required to do a good job of making investment decisions. But if you are, then you know, if you're making, I would consider those asset allocation decisions. It's like you have a bunch of money, you put this much in that asset class, this much in that one, this much in that one. And if it's, for public market securities, you buy a bunch of ETFs and you've, you divvy it up in

between the different, you know, geographical regions of the world, let's say in equities and bonds. Either somebody's advising you on how to divvy that up and at some regular interval, they're coming back saying, well, I think we should adjust that. And here's why. or you're doing that yourself. But in there somewhere, somebody's making a decision to change the weighting, right? And it might be that a particular market has outperformed all the other markets, so now you're really unbalanced. And the decision is we're going to trim back U.S.

because, you know, it's too big in our portfolio at this point, maybe. Either way, when you make the decision, the thing that most people don't do that they should really do is write down somewhere, I mean, even in your calendar, like if you say, okay, on a six-month forward-looking view, or maybe it's 12 months, it depends on what's your time frame, you know, every investor will be different. But let's say on a six-month forward-looking view, what am I expecting out of this? I've decided that I'm going to move. So I actually did this recently. I have kids going off to college soon, and I have five to nine plans for them. And right after the last election, I moved a bunch of money, of equity money into bonds from their 529 accounts because I thought there was going to be inflation. Luckily, I put in my calendar on a, you know, in this case, I think I gave myself nine months and I was like, okay, in the summer, I'm going to revisit this investment and say, okay,

why did I do this? It was because I was expecting inflation. And how did I define that? You know, I expected this number to go to that number. Just basic stuff. Did that happen? Yes or no. What else was I expecting?

Did that happen? Yes or no? Now, in the case of one of the kids, I went back. And in 529s, you can't make a letter trade, so you have to wait. But the other one, he needs the money soon enough anyway, so it doesn't really matter. But I would have missed out. I mean, I missed out on a huge further equity run by doing that. And the bond market doesn't have been particularly good.

So I was wrong. There was inflation, but that didn't affect the equity market, interestingly, in the end. You know, I was wrong about it, but I was able to then check in with it and be like, okay, this is why I did it. That is not how things worked out. Now I'm going to make a new decision that's based on where am I going from here. I don't have to stay wedded to the original decision that I made because now it's like, well. So this is really interesting to me because in the example of a 529 plan, you're back. balancing two things. There's, you know, what will the markets do in the next year? But then there's

also the timeline, right? Because it's with a 529 specifically, that's a very, assuming that you want the child to go to college immediately after high school with no gap, then it's an inflexible timeline, right? That's a hard deadline at which point you start making withdrawals versus, you know, there are certain other goals where you might have a more flexible timeline. I'm I mean, it was easier to move closer to cash than away from cash, I guess. And the fact that you can't necessarily undo your trade very quickly if you wanted to change it back in a 529, whereas in real life or, you know, outside the 529. If you're wrong, you could just, you know, reverse your trade, do it buyback. There's no rule against that.

And I think being able to notice when you're wrong, it's really a difficult thing to do. I was just reading a book called Being Wrong, which is about this. But the point is that we are naturally very resistant to being wrong, to acknowledging that we're wrong, right? And we all know people who refuse to ever say that they're wrong. And there are some people who literally will not ever say they're wrong. And yet, we're all wrong a lot, you know. And in investing, I mean, the people that I deal with are professional investors who are wrong. They're trading stocks all day every day. They're wrong 49% of the time at best. I mean,

sorry, the right 49% of the time at best. The wrong 51% of the time at best. Actually, in an index, I was just looking at the MSCI emerging markets index because I was working with a manager of a fund that's benchmarked against that. It's less than 40% of the stocks. I think it was like in the high 20s, like 28% of them have actually outperformed that index in the last year. So it's like, you know, you're probably aware that if you're holding lots of index funds, there's a lot of concentration that's been going on in the equity markets around tech names and that's not, it was Mag 7 and unique to the U.S. but now in Asia, there's a handful of names that are 25% of the index. So if you're holding an index fund that is based on the MSCI Emerging Markets Index, which you might, because it's like your most generalist emerging markets, you know, exposure that you could get, you might not be aware that it is so heavily weighted towards tech.

And that's also something that, you know, you think, oh, I can just set it and forget it because in the past, equities have tended to go up and here's the math, right? but the past is not necessarily predictive of the future, and the participants in the past in the markets were human, now less and less human. So it's not even the same people, not even the same species that are participating in the market. And it's noticeable when you're in there trading stocks. It's very noticeable. But it's causing the indexes to become very warped, and that means that the risk on them is much higher than it used to be. And nobody's necessarily that focused on that. They're kind of like, oh, I'm safe. I'm in an index fund. It's like, no, it's cheaper than an active fund, but that doesn't mean it's safer. In fact, if anything, a lot of them are riskier because

they're not as diversified because invidia and, you know, these tech stocks have become so huge in there. So yeah, I mean, even just keeping abreast of what is it that I'm actually owning and how has that changed? And has the risk changed over time instead of like, oh, I bought this day one and I'm good. I'm just going to leave it. That can be very dangerous. You mentioned that the overconcentration of a couple of outperformers can make an index overweighted and potentially riskier because you think that you're diversified, but it turns out that your index is just so heavily weighted by Nvidia, Apple, alphabet, you know, a handful of mega performers. I hear people talk about this in two different ways.

I hear people say there's that overconcentration, therefore you should diversify. And then I also, on the opposite side, I hear the argument of, you know, for the history of the markets, there have always been a handful of outperformers. Today it's Nvidia, but back in the day, it used to be railroad stocks. Right. what you're seeing is a feature, not a bug. What's your take on that? I think you can live in both of those. That's intellectually, that's where I would go.

It's like, yeah, that's true that historically, it's always been about a handful of winners and you can't predict which ones those are going to be. So that's why you hold a diversified portfolio in the first place. There's also some structural things around indexes that I think people don't necessarily realize, which is the entire fund management industry revolves around these indexes. And when they get too far out of whack, you know, too concentrated, for example, there are regulations that say that a fund can't hold more than 10% in a given stock. So you can't, if a given stock is more than 10% of the index, then somebody who's an active

fund manager can never hold a full weighting of that stock. And that is happening a lot. That's causing underperformance by active managers, which is causing more. more money to flow into index funds. But you get to a point where the index providers will be forced to change something about the indexes because they're too concentrated and because their customer base is disappearing. And if they make changes to the index, that will have huge impact on the prices of the indices and the price of the underlying stocks that are involved. So the ones that have huge weightings in tech stocks, suddenly, if the indexes,

funds become a seller of Apple or Nvidia or whatever, even just to take the waiting from down by half a percent. That's a huge volume in the market of flow in the other direction. And then on top of that, you've got all the computers that are there running model portfolios

that are all, they're based on momentum ultimately. So we've seen this on the upside. Recently, the momentum has kept going and going. And people who are fundamental investors will say it's like ridiculous. The fundamentals are not being recognized in all these other companies that are doing perfectly well. And it's just the tech momentum. And yeah, it's like a wave that it's got a gravity of its own.

It's got an energy of its own. But it will peter out eventually. And then the momentum can turn to the downside. And the downside tends to go much faster and be much sharper. I mean, it goes back to the financial crisis. The gap down is dramatic. and sometimes like beyond anything that you ever thought was possible. And then the climbing back from it takes some time, usually a couple of years.

It's a dramatic thing to experience that kind of reversal of momentum. And I fear what will happen to those share prices when that goes on. The question is when, right? And nobody can really predict that. And I guess that's where I say to my clients who are fundamental, investors who've always been like, oh, I'm not here to play momentum and just buy what everybody else is buying to get on the wave. That's not a serious way to invest. Okay, that might not be the thesis and the reason that you're buying what you're buying, but you best be aware of it and

cognizant of how powerful that momentum can be because you've ignored it to your peril on the downside for a lot of these sort of more traditional companies that have been darlings of the stock market in the past and have just gone horribly wrong, you know, and the companies themselves haven't. It's just the share price has because everybody's so focused on the AI trade. You mentioned earlier that many trades are happening algorithmically. It's not even human emotion that you're seeing reflected in the markets anymore. It's algorithmic programming. To what extent does that impact everything that we're talking about? I think a lot. I mean, I'm not close enough to the analysis of the market structure these days, but I bet it's very fascinating.

to look at whoever is doing work around that to see how the market has, there are a lot more parties involved who are doing different things because computers make that possible. So you could have your, you know, retail punter who's on their mobile and they're using Robin Hood and their trading stocks. Then you have your responsible mom and dad. They've invested in their index funds and they're just trying to like lay low and keep things ticking over. Then you've got your fund manager who is doing lots of in-depth research and making really, really, you know, put a lot of energy into deciding whether to invest in a stock. And then when they do, they go in really big and it takes a while. And then you have quant funds that are just trying to play off

all those people. So they're watching, they're consuming data about what you're doing and what this guy's doing, what that guy's doing, whether that's, you know, representative of retail pocket, institutional pocket, you know, different types of investor. And they're just trading a strategy based on what we're up to. And it just like gets very meta. You have people trading on top of people on top of people. It's not about the fundamentals necessarily for a lot of the different people who are participating.

And that changes a game, you know? It really does. What you just said reminds me of this quote from Morgan Housel, where he talks about how people get it wrong in the stock market because they take their cues from people who are playing a different game. Yeah, for sure. Like anybody who's watching CNBC, you know, and taking their cues from that, those people on TV are definitely playing a different game. It is a game of usually talking their own book or building their profile as opposed to being a long-term investor. But sometimes they're a long-term investor.

But yeah, usually the people that are talking a lot are the people who are being short term because otherwise there would be nothing to talk about. And that's not necessarily what you're, I mean, if that is what you're trying to do, great. I was just talking to an old colleague of mine who, that's just what he does. His retirement is trading his own book. And it's not, he's not just punting around. He used to be a fund manager. So he knows his stuff.

But he's way more short term than we ever were. when we were running money together. And that's just who, that's his personality. And it's what he enjoys, you know. So it's like, okay, now he's retired. He can, it's his money, he can do whatever he wants. But for the majority of people and certainly for the people who are listening, we're long-term investors.

Long-term investors can often get it wrong when you're taking cues from players in the game who are playing a different game. Yeah, yeah. Yeah. Everybody's got a different game, you know. Even if you're playing the long-term game, Within that, you have a lot of different sub-games that people are playing. And so it is important to recognize what game that person you're about to take advice from or that you're listening

to anyway is playing. I mentioned earlier. There are two directions to take this in. There's the index fund direction and the individual stock direction. When it came to behavioral biases in terms of how people deal with decision-making, we've talked for a while about index funds. How do these concepts relate to decision-making around individual stocks? Because for the average person listening, that might be maybe 10% of their portfolio. I mean, the same principles hold. It's like whether you're buying a fund or buying a stock, you're making a set of decisions that goes beyond picking that stock or that fund. So everybody focuses very heavily on the research around that company. And I'm going to pick that stock for these reasons. Obviously, that is important to have a good reason and thesis behind

your pick. But the pick is only one decision that you're making. You're also making a decision about when to do it. And so if you're rebalancing your fund allocations or if you're buying and selling stocks, either way, you're making a decision about when you're going to do that. You're making a decision about how much, you know, how big you go in a particular stock or any investment, really, how fast you build that, you know, with, well, the same would hold for funds as will hold for stock, but you could just like buy a little bit every single day for a period and try and like average up or down. Or you could go all in, you know, there's not necessarily right answer to that. But if you analyze your past behavior, then you can see whether what you've been doing historically

and whether that's been working. And that's what we do with fund managers. So we're looking at they're picking decisions, their entry timing decisions, they're scaling in, That's how fast do you get in. Sizing decisions, how big do you go? Like, should you just have an equally weighted portfolio? You know, I mean, there's an argument for that, no matter what you're buying. If you could analyze what you did versus an equally weighted version of the same thing,

you might find that the equally weighted one does better. And actually, that's just fewer decisions that you have to make. So that's making your life easier. In fund management world, there's an ego thing that gets involved because that pretty, person feels that that's, but part of what I'm so good at is, you know, conviction and I size, along with my conviction. And you can say, well, okay, can we just test the hypothesis that your conviction is actually predictive of outperformance because it might not be, you would like to think that it was. But honestly, I think for most people, it's not correlated. I do not have the

science to prove that yet, but I do think that, well, we can see it from the hit rate, you know, that most people, particularly if they're investing in individual stocks, we've seen it, even the best ones, we're only getting it right, 49% of the time, 50% of the time, that's in relative return terms. So they're only outperforming the index that much of the time. In absolute terms, it's like, well, if everything's going up, you're going to have a high hit rate. Your batting average will be very good. But the other piece of it is, and it comes out in the sizing and the timing and not only the timing on the way in, but on the way out, how do you scale out and how fast do you get out? When do you get out?

You're making all of those decisions that often are just a byproduct of your decision to buy something else on the other side. You need the cash so that you can buy this other thing and so you decide to sell this thing. That may or may not actually be a good decision, but it's just what happens. When you have a portfolio of stocks and you have options on what you can buy and sell, you could get that cash from somewhere else, then you have less of an excuse for being like, well, I needed the money. So I had to sell Nvidia last year. That would be more the case for you or me.

But if you're running an investment portfolio, you can make a different decision to exit something else to buy this thing that you want to buy. Thinking about the exit decision is extremely important. And thinking also about the relative size of your winners versus your losers. Being an investor is not actually about getting it right all the time or even more than half the time. It's about what do you do when you're winning and it's going well? And what do you do when you're losing and it's not going well? And that applies to stocks.

It applies to any asset you can think of. When you're talking about stocks, you have more opportunity to act. You know, you could act rightly or wrongly, but either way, there's a market every single minute of the day and you could trade if you want to. So the thing we, so I mentioned hit rate before. That's like how often are you right? The payoff ratio is about how right do you tend to be versus how wrong you are when you're wrong. So if you look at every past investment that you've made and calculated it out, what was the average return? on all of my winning investments, and then you divided what was the average return on all my losers, absolute return of it anyway.

Ideally, it would be over 100%. Your winners would have made you more money than your losers have lost on average. That might or might not be the case, you know, but if you're going to be really responsible with your investment portfolio, then having an eye on that payoff ratio and making sure that you let your winners run. so that they can get big, but you have a cutoff on your losers so that they can't ever do so much damage. I was working with a client the other day, actually, who the person responsible had been fired, but what he had done was get very, very loaded up in some microcap stocks in international markets and very, very highly convicted.

And so built huge position, his biggest position. with his biggest positions and these things were just tanking and the liquidity was not there to get out and this portfolio was like on the brink of having it to shut down although interestingly this person got in touch with me and he said I need to tell you a sob story and I need you to help me and I said okay let's see you know can you get me the data now normally somebody like this he's he's running a hedge fund but it's not that big the tech for such things, the service provision at that level isn't much better than what you would get as a retail investor. It's just spreadsheets being pulled out of a pretty old platform. Whereas in the institutional

fund management space, you have more robust infrastructure, so pulling data becomes a little bit easier. And I normally wouldn't be able to help this guy because he wouldn't be able to get me the data I need, which is daily holdings data. Just what's your portfolio holdings every single day, once a day going back as far as you can go. And he said, well, I do have that by PDF. They send me a PDF once a day. I said, all right, get on Claude. See if you can scrape your PDFs.

Like, you might actually be able to build the data file out of those PDFs. And three days later, he's like, here's the data. For me, that was like, huh, that unlocks the ability to do this sort of analysis for anyone, really. If you were really nerdy about it, you could either scrape together your daily holdings or put it together yourself. And you can do some basic stats, you know, you don't need to pay me to do it. You can do some basic analysis yourself. But if you really want it, if you're an avid trader who, you know, really is serious about making money in individual stocks, that's no joke. That's if you're not going to be serious about it, that's gambling.

If you are going to be serious about it, there is skill to it. So it's not the case that no one can make money that way, right? So the average person doesn't. So if you want to be one who's above average, then it's like being an athlete. You know, what are you going to do? Analyze your performance, analyze your practices, analyze every little aspect of what you're doing, and watch the game tapes back and understand what you do well and what you don't do well and adjust accordingly. That's the hard part.

That's the discipline. That's the part that if you don't really want to put that kind of, of energy in, like, that's no judgment on you. But better to be honest with yourself about that and outsource to a professional, you know, or find an app that can do what you need it to do, but it doesn't require you to be responsible for making that many decisions because these decisions matter in the end. And it's too easy to mess around with your own money and think it won't really matter. You know, fast forward 30 years. You won't be retiring at 52. You need to be very careful. You talked about what separates good investors from bad investors or successful ones for

unsuccessful ones, is how you react, both in good markets and in bad. And in your research, you have found five archetypes of behavior, of investor behavior. Each one, each archetype describes a different way of reacting in both good and bad markets. I'd like to go through that framework, just so we have a language to talk about the different ways that you've observed people react. Yeah, sure. The tribes, as he calls them, were coined by my co-author Lee Freeman Shore, who wrote a book about 10 years ago called The Art of Execution. And this was about fund managers. It was, you know, same topic. In his case, it was about given a bunch of the top investors bits of money, large bits of money, and saying, and this was, you know, by design as part of an

institutional offering, saying, I want your best ideas. Give me your 10 best ideas. You give me your 10. You give me your 10. And then I'm going to put together a portfolio based on all of these best ideas. And he learned a lot of lessons, not least that there were these different categories of behavior. So you have, how do you behave when you're winning, right? Now, some people just sit back and watch and relax and, you know, ride it out and maybe like managed to not take profits. I mean, it can be very, very hard, right? You've made a lot of money and something. It seems like the wise thing to do. And maybe it is, but I also know a lot of people who have exited entirely from some of these tech companies. And the inability to get back in psychologically has been very clear.

And it's caused them huge problems in their portfolio. So I'm not saying the answer is never take profits, but the size of the profits you take matters. But he calls these people connoisseurs. These are the ones who let their winners run and just be patient. They might have some big drawdowns. Like things don't always go up in a straight line. They might go up and come back quite away and then carry on going up. And riding through that, it takes nerve, you know, and it takes.

takes patience. And that's way easily, more easily said than done. And in this book, the stock market maestro, it's interviews with different managers so that you can see, it adds dimension to like, what does that look like? You know, show me some examples of when one of these guys, it's not just they bought some Apple 20 years ago and then went to bed and woke up and it's today, you know, that every single day they're in the office. That's a potential day they might just sell apples. Before we move on, how do connoisseurs, you've described how they react when things are going well.

They let the winners win. How do they react when they have a holding that's just tanking? So we're all something when we're winning and something else when we're losing. And so a connoisseur, when they're winning, could be any of a few different factors when they're losing. So, you know, you can be a rabbit. Oh, I see, I see. So you can be one thing when times are good and a different archetype when times are bad.

Okay, cool. All right. So when times are good, you have the connoisseur just like lets it ride. They're watching, but they let it ride. They know what they're doing. Like they're very invested in understanding the thing. Then you have the Raiders. Those are people who are like, oh, I'm going to take profits.

I'm going to take profits. And it feels good at the time to take the profits. but you're just capturing small gains. And if you're not cutting your losses equally quickly, you're going to have a problem with your payoff ratio. So you make it harder on yourself by only taking small profits here and there. And for those Raiders,

what are they doing with the profits that they take? Are they choosing different investments? Sometimes they're reallocating it within existing investments. But yeah, usually they're picking something new. And that's a lot of work as well. You have to do that much more work to keep your bench full of new investment ideas. So, I mean, one of the analyses that my company does and that we did for all of these people was something called alpha decay. So it actually goes back to the point about endowment effect.

So this is the bias about overvaluing something because it's yours. That shows up in investments. if you plot, in this case, we're talking about a stock, and you could say the same of a fund or anything else, really, but we're talking about the value of that stock versus the value of a benchmark. That benchmark could be zero if you wanted, but in this case, you just use an index fund because that's your other choice. How does that outperforms, that excess return, if it does outperform, tend to accumulate?

Like if we look at that across every individual investment that you've ever had, the lifeline of it will look different. Each time is going to be a little bit different. But if you put them all together, you'll find a pattern usually. And the pattern for winning positions tends to be they go up, up, up, up, up. And then they either tail off, not much happens after a certain point or they go down. And that's just looking at the ones that the managers kept, right? So the point is that that alpha, that incremental alpha generation, that incremental excess return generation tends to peter out after a certain point. And on the downside, if when you're losing, there's a point where things get worse.

You know, like there's a point where actually it would make sense to pull the plug. If this thing hasn't done what it's supposed to do within, it's usually around six months, but not always. Within six months, risk is on the downside. that it's going to get worse. And so what we do is pinpoint these points for these people and then show them these are the stocks that you need to make a deliberate decision about about what to do with. And the point is to help you figure out when to get out because when you're winning, you know, the guy who is a connoisseur, he rides this winner, it's all good. But if you're not careful, these things have a way of becoming losers, you know,

becoming a round trip. That's really horrific when you're in it because you've gone around the market talking the story about the stock and you made so much money from it and now you gave it all up because you didn't get out fast enough because you were so like hopped up on it. That's a very real danger. And then suddenly you're a loser. Well, you're a loser. It's a loser. What do you do when you're losing. You know, well, you can freeze and do nothing or just dig a little deeper, keep buying. Like, oh, now it's really cheap. Now buy some more. Now it's even cheaper. Oh, my God. Now I've got to buy more. That's what the guy I described earlier who was so convinced. He just was like, it's only getting cheaper, so I'm only going to buy more. That's like a rabbit

that is burrowing deeper into its whole. Whereas the people who are best at losing are the ones who Either they're a hunter, which is a person who, sort of like the opposite of the connoisseur, they sort of sit back, they watch, they're like, I'm cool, even though this thing's down 50% or whatever it is. My size isn't so big that it's destroyed my portfolio. And I haven't used up all my firepower. So I wait and then there will come a moment and I'll double up or like take a big shot. Like in the safari, this is my idea of what it would be. like to be a hunter and safari. I will never know. You're just, you're being patient and then you you take your shot. The equivalent of, I guess, of the raider is the assassin. Being an assassin's

a good thing in this case. It means that you're good at dispassionately cutting a position. It's like, this isn't working. I take it out and I'm, I'll do it again. You can just do that before those those losers become too big and too much of a weight on the portfolio. It actually sounds like the assassin then is the opposite of the rabbit. So the rabbit just burrows deeper. Yeah, or it just freezes in as like, I'm just going to sit here and hope this gets better. Okay. Which is what most people do, really.

Yeah. Okay. Rabbit either freezes or burrows deeper. So when things are bad, rabbit freezes or burrows deeper. Assassin, like, cut, kill. We're done. Yeah. And then the hunter's like, I'm just going to sit back.

and I might have to assassinate this thing eventually, or if I see my moment, I might go big and really take a bet. And that can be very successful if you're right. I wouldn't necessarily recommend that you or I do that type of thing, just because I think that's for the people who live and breathe individual stocks that like really, really know the inner workings of these companies and these share prices. So it's very hard to do. that being an assassin isn't so hard to do, actually. And it sounds cooler. I don't know.

When I talk to people about these things, they're like, I want to be an assassin. Okay. Being an assassin is just a matter of having some rules and saying, okay, I will not let any one position do more than X percent of damage on my overall value of my portfolio. 1% is a good rule of thumb. That means that if something, you have to have a rule. If something hits that point, first of all, you have to be able to measure that. But if something hits that point, you have to do something. Now, it doesn't mean you have to sell, like you decide what you're going to do.

I would say that's a good point to ask yourself a set of questions that are designed to help you be really honest with yourself about whether you should stay or whether you should go and then just do it and not let it be about, well, it's just getting cheaper. It's just getting cheaper. That's not a good enough reason. So that's one rule that you can have. but in the book, there are a bunch of different practices that people have. And in the end, they all come back to the same thing of setting out in advance.

When you put the money in, you know, when you put in your calendar six months from now, I did this for this reason. I moved that money out of equities into bonds because I think inflation is going to go up and I think the equity market is going to suffer. And I need this money to pay for college. And I'll know I'm wrong. How will I know I'm right if that happens? How will I know I'm wrong?

Well, if the opposite happens, which is what actually happened, the equity market just kept going up. Okay. What will I do about it? If I'm wrong when I check in at this point, try and come up with your game plan that it doesn't start and end with you buying the investment. There's a life of that investment in your portfolio no matter what it is. And you need a game plan for like, okay, if this happens, I'm going to write it out or I'm going to buy more. If that happens, I'm going to move out of that. and by this time.

And then you have to be able to hold yourself to that, which means you've got to make it really easy to remember the information, which is why the calendar hack is just like a super easy one, because if you use your online calendar, you're going to see it anyway. It sounds like when things are going well, you could be a connoisseur, or you could be a raider. When things are going badly, you could be a rabbit, you could be a hunter, you could be an assassin.

Yeah. So those are the five archetypes. divided into when things are going well and when things are going badly. Yeah. And the way in which you make those decisions, the ideal way, would be to have a written set of questions that you ask yourself to reflect on why you made the choices that you made and what the circumstances now are on the field. What are the current conditions on the field? How has that changed? And given all of that information, what is the new decision from this point forward.

That sounds a lot like having an investor policy statement. Kind of. It's not necessarily as high level as the investor policy statement would be. The questions you're asking yourself, you might choose to always ask the same questions or you might have individual ones that you want to ask in certain circumstances. But the point is your policy is I will always set out a game plan for any investment that I go into and I will respect this game plan

and follow it. That's another area, though, where I think AI stands to be really helpful. The hardest thing is remembering what you're supposed to be paying attention to at any given time. And if you can get AI to ask you the questions, or even just, you know, if you tell it, I've just done the following acid allocation, and you train it to ask you certain questions to capture the information that you need to capture, it takes like two seconds. It's not hard. I think, you know, it's more and more people will end up doing that, or it may well be that gets built into trading platforms. Right. You know, as you're talking, I'm thinking about either what checklist of questions can we develop based on the conversation that you and I have just had or what prompt can we develop based on this conversation that we can give to our, you know, I'm like, all right, we should, we should do this. We should like create a checklist or create a prompt and then give it to our listeners that allow people to ask these reflective questions.

questions as they're thinking through their own portfolio. Yeah. At some point, I'm going to create a course about all of this stuff, and that's prime. But I would love to show it to your audience first and see what they make of it, because it needs to be simple enough that you're going to do it. Right. It's not that, like, you don't understand it or intellectually is challenging. It's the actually doing it part. that's the, you know, having done this sort of analysis now for 14 years after being a fund manager for many years before that, I think in the end, the real learning is about the human behavior around being disciplined and capturing this sort of information and then looking at it again in the future and making that very easy on a human is a really interesting challenge.

Right. Actually, and that brings me to, you know, I know a lot of people who say that the more complicated you make something or the more steps that something requires, the more friction inherently there is, and then that decreases behavioral compliance. First, do you agree with that statement? Have you seen that to be the case? And if so, how do you make something simple enough, but no simpler? Yeah. Well, and it needs to be that the output of it is interesting or useful. Right. So capturing, asking yourself, let's say, and I agree with your point about if there are too many steps, at best you just lose people's interests and they don't keep going. But at worst, you end up with mistakes and, you know, things that go wrong. So when you're asking yourself questions about an investment, we have some clients will be like, okay, I've just spent hours on this and here's the list of questions I want you to ask. And it's like really long list. And you think, you're never going to fill all that in. You know, even if it's multiple choice, it's just a lot of clicks. It's too many clicks.

So how about five? Five is my rule of thumb in terms of number of questions to ask yourself. Simple ones with a multiple choice answer, ideally. Okay. That's what we'll generate for our audience. Five questions, multiple choice. Yeah. Yeah, that's good.

And then it's like, okay, you want to make sure that the questions that you're asking, that you're not going to answer the same option every single time. So, you know, what is your conviction high? Well, if it's always high, then that's not a very useful question to be asking yourself. So there's some tweaking along those lines to make sure that the answer choices are relevant enough that you're not going to pick the same one over and over because then the analysis is boring. But if you can capture that, you know, you decide what the questions are, decide what the answer choices are, and then capture those in a data file. even just the process of doing it in the first place is a positive exercise. Like, forgetting the data analysis down the road and all of that, just going through

and really asking yourself, like, good questions. You come away knowing, okay, I just made a deliberate decision. I might be wrong or I might be right, but I did do my job as a decision maker to think hard about that. And I followed my process, which is to ask this question and this question and this question. So at least you did your process, now you can move on. And as you're capturing that data, if you can then connect it, this is what my company does with what I was able to do for that guy who he captured just his trade data through

PDFs, but we can connect the data about why you did what you did to the actual trading data. And, you know, answer a lot of questions that if you do trade enough times, you might, and even if you don't, you probably have hunches about your own behavior. and your own tendency to panic or to not panic or to wait too long or to, you know, whatever. Like the people close to you could probably point out these patterns better than you could, but you might even have the self-awareness to know. There's one way to find out for sure. It's a little bit like thinking health-wise, like you might have a twinge of something.

Well, go get your blood work done. You can find out. You don't have to show anybody. With this, yeah. Maybe I should try and find a, what's like a really simple way to do this so that it would hook up with the data that your listeners are actually getting out of their investment platforms. Well, okay. There's probably a way to do it. Yeah.

The most basic data that you get is a quarterly snapshot of your portfolio. You know, here's the value of my portfolio. and the asset allocation of my portfolio as of the end of Q1. And here's how it is as of the end of Q2. That is the easiest, the simplest, I mean, that's just right there. You would do that. You could, you know, as long as you're long term, then that's fine because you can say, you know, every time you make it change, you record, you ask yourself certain questions, you record the answers. And then you can look, take all your statements as they come through and you can see, did these things work out or did they not? And how often did that, was that

the case. And you won't get necessarily the exact right answer because you're working with quarterly data and you might have made your decision in the middle of the quarter and it's, you know, it's not that accurate. But you'll get the message one way or the other, you know, you'll still be able to tell whether you're making good decisions or not and how often. Right. And it'll be directionally accurate. And particularly if you're, again, going back to timeline, like when we're talking about the 529 plan, if what you're trying to solve for, for is you're trying to solve for different buckets of goals, right? So in your retirement accounts, you might be trying to solve for a goal that's 20 years away. In your 529 plan, you might be trying

to solve for a goal that's five or six years away. And maybe you have a different bucket of money that's in which you're trying to solve for a goal that is three years away. Yeah, and each one of those is a different portfolio, basically. Yeah, exactly. And so you might be trading the same stock or the same fund for all of them, but you might not make the same decision in all of them because your time horizon is different. Exactly. We're coming close to the end of our time. For the people who are listening, who are focused on their portfolios, they're focused on building their net worth and reaching financial independence. Are there any particular messages that you have for them? Yeah. I mean, first of all, congratulations for educating yourself

and trying to make good decisions, which is presumably what your listeners are doing because they're consuming this advice and the framework that you've put in place that teaches them, everything is a trade-off. And you have to make prioritization decisions and you have to make trade-off decisions all the time.

And that requires discipline. It requires energy to be put into it in the first place. And it requires a level of, of, patience and I guess denial of quick gratification, you know, denial of our base human urges, which are for greed and fear and, you know, the things that make people gamble and punt on stocks. It's like if you're being long term and you are actually being it, that's all you need to do. I mean, and that doesn't mean just put your money somewhere and then forget about it and come back in the long term. It means constantly recalibrating what your needs are, what your deadline is, what your time horizon is, and all of that.

And also what your wants are and constantly redoing that equation, you know, of what do I have to give up and what assumptions do I have to make for that thing I want to actually be realistic? I think that being realistic pieces, that's what I love about what you're doing with this podcast because you're helping people be realistic with their. with their money and not succumb to all of the biases that would lead us to be like, I'll worry about that later, you know, or it's going to be fine. Maybe. It might be. That's a possibility. But if you're realistic and disciplined and methodical, and it doesn't have to be like your

full-time job, you just need a bit of structure that you actually follow around how you invest. If you do that, you're going to be fine. Beautiful. Well, thank you so much for spending this time with us. where can people find if they'd like to learn more? Well, so stock market maestroes you can find on all good booksellers websites. I am best found on Instagram as Claire Flynn Levy, where I talk actually more about AI and just stuff I'm interested in on top of investing, but also on LinkedIn,

most of my content around investing and decision making you can find on LinkedIn. Thank you, Claire. And you can get Claire's book, Stock Market Market Market Maestro's, a book about the winning habits of the world's best investors, anywhere where books are sold. What are three key takeaways that we got from this conversation? Key takeaway number one. Writing down your reasoning prior to when you invest is more powerful than making any kind of market predictions. A lot of investors spend a lot of their energy trying to predict the future, trying to pick the right investment, trying to figure out where the economy is going,

but they make almost no documentation on their thinking process at the time that they're going through it, on what's going through their mind when they're making those choices. Claire says that the single most useful habit that you can build is recording your thesis at the moment that you make a decision. Here's what you expect to happen. Here's how you'll know if you're right. Here's how you'll know if you're wrong.

You set a calendar reminder. and you go back to check. It sounds very simple. It is very simple, but few people do it. This is the gap between what we know we should do and what we actually do. That's why accountability and community is so important to bridge that behavioral gap. The difference between doing this versus not doing this, recording those decisions versus not, that's the difference between seeing a snapshot of current reality, like a photograph of it,

Like it's preserved at that moment in time in exactly the way that it was versus trying to remember it through this cloud of nostalgia bias and hindsight bias through which you don't recall it with complete accuracy and therefore you lose some of the lessons that are contained in it. I put in my calendar, in this case, I think I gave myself nine months and I was like, okay, in the summer, I'm going to revisit this investment and say, okay, why did I do this? It was because I was expecting inflation. And how did I define that?

You know, I expected this number to go to that number. Just basic stuff. Did that happen? Yes or no. What else was I expecting? Did that happen? Yes or no? I was wrong.

There was inflation, but that didn't affect the equity market, interestingly, in the end. You know, I was wrong about it, but I was able to then check in with it and be like, okay, this is why I did it. That did not how things worked out. Now I'm going to make a new decision that's based on where am I going from here. That is the first key takeaway. Key takeaway number two. Being a good investor isn't about being right. It's about what you do when you're wrong.

Even the best fund managers are wrong nearly half the time. And so what separates them isn't their hit rate. It's the payoff ratio, meaning that the winners are bigger than the losers. The way that you build that ratio is by letting your women, winners run and by cutting your losers before they do too much damage. So the goal isn't not to lose. It's to make sure that your losses stay smaller than your gains. Or set another way to make sure that you have just a couple of great gains that overpower all of your losses. You know, you think, oh, I can just set it and forget it because in the past, equities have tended to go up and

here's the math. But the past is not necessarily predictive of the future. It's cheaper than an active fund, but that doesn't mean it's safer. In fact, if anything, a lot of them are riskier because they're not as diversified because NVIDIA and these tech stocks have become so huge in there. So even just keeping abreast of what is it that I'm actually owning and how has that changed? And has the risk changed over time instead of like, oh, I bought this day one and I'm good. I'm just going to leave it.

Finally, key takeaway number three. Even index fund investors need to know what they actually own. If you are an index fund enthusiast, as I am and as many of us are, we all get it, right? Low-cost, diversified index funds beat most active managers over time. That is clear. That is obvious. That's not in dispute. But Claire raises a really important point.

And she says that because a handful of tech stocks have grown so large, many broad index funds are now much more concentrated than they used to be, which means that the risk profile of your fund might have quietly shifted, even if you yourself have not made a single decision. Like, you don't need to trade. You just need to periodically look under the hood and make sure that the fund that you bought five years ago still reflects the diversification that you think you have. Being an investor is not actually about getting it right all the time or even more than half the time. It's about what do you do when you're winning and it's going well and what do you do when you're losing and it's not going well. That applies to stocks. It applies to any asset you can think of. Thinking about the exit decision is extremely important and thinking also about the relative size of your winners versus your losers.

Those are three key takeaways from this conversation with Claire Flynn Levy. Thank you so much for being a part of this community. If you enjoyed today's episode, please do three things. First, share this with the people in your life. Friends, family, neighbors, colleagues. Share it with anyone who has ever held a losing stock hoping that it would bounce back. Share it with anyone who's never written down why they made an investment choice. Or share it with the people who have.

But you're more likely to find people who have never done it because most of us have never written down why we made the choices that we made in our portfolio. Share this with people who. fit some of those descriptions that you've heard, the assassin or the rabbit, share this with all of those people and more because that is the single most important way that you spread the message of F-I-I-R-E.

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