 Good day, fellow investors. Today we're going to explain a few behavioral finance concepts that are extremely important for investing success. The first thing that I'm going to explain is the recency bias. Then we're going to discuss probability neglect and discuss the emotional investing cycle that is connected to loss aversion. I will try to explain all those concepts in a very simple way. So let me start with the turkey problem. If we look at the turkey's life happiness index and length, it looks like this for the first 1000 days. The turkey's happy is getting fed every day and if you put 10 PhDs to analyze the situation, they will probably estimate that the turkey will continue to live as it has lived in the past. If you look at the SAP 500 in the last 8 years, it looks exactly like this. However, the turkey's problem is that he doesn't know that there will be Thanksgiving and this happens, unfortunately, for the turkey. So when investing, we have to be very careful not to have the turkey's perspective on life because he feels great, he's complacent until Thanksgiving comes and remember Thanksgiving always comes for the turkey and on the stock market because sooner or later things change because the stock market is cyclical. So we really have to be careful not to have a recency bias, not to look at what has happened in the last few months, in the last year, in the last 8 years because the stock market is evolving in much, much longer cycles. We are talking cycles about 75 years as Ray Dalio often mentions, but he doesn't mention it so often because nobody likes to listen to things that evolve over 75 years. If you look at the media, they are constantly talking about what happened today and yesterday. Something that happened last month is already ancient prehistoric news. So when investing, really look at what can happen from a fundamental, from a common sense perspective, not just from what happened in the last few months. This is difficult because you have to be a contrarian, you have to look from a different perspective than the crowd. So you have to be different than everybody else, but this will lead to higher returns in the long term. And I'll explain later in the emotional process that we have when investing how our returns are negatively affected by our emotions and by the recency bias. The second thing where we humans are very, very bad at is thinking in probabilities, which is a concept called probability neglect. We are very bad at thinking in probabilities. We think about what can happen but not at the probability of that happening or not. So if you want to invest with low risk and high returns over a very long term, you have to learn how to think in probabilities. So whenever investing, always ask yourself, what can go wrong? What went wrong in a similar situation in the past 200 years, 2000 years, if you really want to dig deeper, and a lot of hedge fund managers, said Claremont, Ray Dalio, they really dig back 3000 years to understand the current environment. And then everything becomes very familiar if you're willing to do that. I know it's boring, but it will make you money. So first start thinking, okay, what can go wrong and what is the probability of that going wrong? Or what is the probability of that going well? My favorite example is always Tesla. Now, those invested long in Tesla, they don't think in probabilities because they see, okay, Tesla will make it, Tesla will succeed, Tesla will disrupt the automotive industry. Those short Tesla are negative, Tesla will go bankrupt, that's it. However, a real investor would attach a probability to Tesla succeeding, analyze the fundamentals, analyze the cash flows if Tesla succeeds, and then attach a probability to Tesla not succeeding, and then see from a probabilistic way at what level is Tesla a good or bad investment. What's very interesting is what happens if a recession comes with Tesla, and there is a tightening in liquidity, they can't refinance, they can't raise new capital, then all that changes. But nobody's thinking in those probabilities because nobody's expecting a recession to happen ever, ever again. This is a beautiful chart that describes the emotional cycle humans have. As you can see, we are now totally in euphoria, thrilled about stocks, excited, those will grow, the economy will grow. However, just a few years back, everybody was so negative. In 2008, everybody was capitulating panic, fear, desperation, so it is very interesting how this works, and the cycle constantly repeats itself. Usually at euphoria, when then when the stock market reverts, we go to fear, desperation, panic, capitulation, etc. And that usually happens very, very fast. So it's very difficult to be prepared to what will happen and time the market, because it will happen extremely fast. However, what you can do is to adjust your financial life to whatever can happen. There is a probability of a stock market crash and stocks falling 70%. Are you prepared for that? So just think, okay, what would I do if that happens? And that is already one huge step forward and one huge step divergent from all the other people that are investing in the market. What is the result of this emotional activity and that people don't think in the long term this? In the last 40 years, the average U.S. investor got a return per year from stocks of 3.7%. The market returned 11.1%. That difference is huge. The culprit behind that difference is emotions, because people usually do the wrong things at the wrong time. Buy high, sell low. What to do? Dollar cost averaging, be prepared. Okay, if the stock market crashes, 70%, what will I do? How will it impact my life? How it will change where I live? If there is a one-year recession, what will I do? Am I hedged? Am I protected? So really think about what can happen in a probabilistic way and then attach your portfolio to those probabilities. I am now about 10% exposed to gold. I expect financial turmoil to happen somewhere in the next 10 years. Thus, there is a 10% chance of that happening. So 10% of my portfolio is hedged, gold and other hedges. So really think also in probabilities and then you are a good investor for the long term and you can expect to beat the market in the long term, not as the average investor underperforms the market, even in a great market. To conclude, investing is very personal. It is very emotional and I see a lot of emotional comments here on the channel. So you really have to think before what am I going to buy, what am I going to look for, where am I going to invest. Think about your emotions and how those will affect you and your financial life when things change. That's it. Think about, be prepared and then you will fare much, much better in the long term, which is important, as we are all going to live 100 years. Thank you for watching. Looking forward to your comments. What do you think about this? Is there something you want to add? Am I wrong? Especially comment if you disagree with me. Thank you for watching and I'll see you in the next video.