This means that if you believe in UFOs, you will pay close attention to and feel gratified by stories told by unusual people about being abducted and experimented upon by aliens. By contrast, you will pay little attention to the suggestion that the idea of super-intelligent alien beings visiting earth and principally abducting oddballs from rural America is probably nonsense.

 

The more arguments you hear that support your world view, the stronger your confirmation bias will become. In addition to UFO spotters, this phenomenon can be observed in conspiracy theorists, alternative medicine practitioners and anyone who has ever visited a psychic. But we all fall victim to our own confirmation biases every day, most importantly when we make investment decisions.

If you remember, as the stock began to tumble, there were competing views among the commentators. The analysts who made the most sense to me were those who said HSBC remained a stand-out in the banking world and deserved its higher valuation.

If I had paid slightly more attention to those that said HSBC could not avoid the drop in asset prices affecting the whole industry, and that they would be forced to raise new equity one way or another, then perhaps I would not still own that block of shares, now trading at around HK$65.

Confirmation bias kept me from giving sufficient weight to the evidence that the fundamentals of my investment were changing. Being aware that confirmation bias is a natural human tendency can help you to change tack faster when circumstances change.

Investment tip number seven is: it is worth reading company balance sheets. Obviously, if you have studied accounting, you will get a lot more out of this than if you had studied philosophy, but there are still a few obvious things that you can look for. For example, all balance sheets have current assets in one place and current liabilities somewhere else.

Current assets are things that the company can quickly convert into cash such as money owed by customers, inventory or stocks. And current liabilities are debts that are due pretty soon, payments owed to suppliers, short-term loans, that sort of thing. Look for how much current assets exceed current liabilities. This will give you a view on how likely the company would have a problem paying its debts.

Tip number eight: for every day trader who tells you he is making a packet on the market, there are 100 who are sinking deeper into financial disaster. And the guy who tells you how well he is doing today won't tell you that he took out another mortgage on his apartment last week.

Day traders are like gamblers. If you've ever known any serious gamblers you'll know that they are full of stories about how yesterday they made a killing on blackjack or how they walked out of the casino last week with pockets full of cash. They don't tell you about the far more numerous times they couldn't get home because they had exhausted their entire bank account waiting for their luck to change.

Stories about bankrupt gamblers or failed day-trading strategies are strangely difficult to come by, but that's not because they don't exist.

 

Tip number nine: sentiment is as important as analysis. It doesn't matter quite so much if a stock is undervalued, it matters a lot more if people think it is undervalued. The worldwide stock rally that took place over May and June wasn't because anything really got better; in many ways, things got a lot worse. The rally was driven by positive sentiment, and that's what moves markets.

Sentiment is a lot more difficult to read than balance sheets, but you have to pay attention to it. And the way to do that, unfortunately, is to keep an eye on the media. If enough people on TV start saying that markets are going to rise, then they will. Sad, but true.

And number 10: at the end of the day, the stock market is not rational. No matter how careful you are, or how well thought out your strategy is, the market will surprise you. There's no tip anyone can give you to solve this problem; you just have to accept it. The only comfort is if the market is rising incomprehensively this week, it will be falling incomprehensibly next week. Or, next month. On a long enough time scale, the market will make everyone's predictions come true.

So that's my Top 10. I have already received many excellent suggestions from readers, so please keep them coming. Soon I'll put together the cleverest, most informative and funniest comments into a readers' feedback column.