Investing successfully is even more complex than it first appears. As well as making tough decisions, such as which stocks you should buy this month, you also have to contend with your own psychology. Sometimes, investors can be their own worst enemies.
Biased thinking is one of the biggest dangers, according to Tristan Chapple of Phoenix Asset Management, who has listed four bad habits that are all too easy to slip into, but hard to get out of.
1. Charisma bias
Beware the power of the charismatic CEO. Even experienced fund managers can fall for it, blinding them to the true merits of the company in question. Chapple will not even think about buying a company’s stock for 48 hours after visiting, giving him time to reflect on the fundamentals after the buzz of personality has evaporated. Should you invest in Tesla because you believe in Elon Musk, or ask “boneheaded” questions about the company’s bottom line? Personally, I’m with the boneheads.
2. Loss aversion bias
Humans hate losing stuff, and they especially hate losing money. Losses loom larger than gains, perhaps even twice as large. The result is that many investors prefer to look at the positives, which loom larger than the negatives. So they might look at the upside of an internet gambling stock, and ignore the damage inflicted by potential regulation.
3. Status quo bias
It is all too easy to be lulled into thinking that things will remain as they have been, and invest accordingly. However, the status quo is neither inevitable nor enduring, it just feels like that at the time. Just because a portfolio favourite has performed well year after year, doesn’t mean it always will. Chapple submits all his long-term holdings for re-evaluation every three years, getting his analysts to produce both a bull and a bear case. Maybe it’s time to play devil’s advocate with your portfolio to see whether your favourites can survive the ordeal.
4. Certainty bias
It’s the biggest investment cliche of all: stock markets hate uncertainty. Individual investors hate it too, and create false certainty by putting nice round numbers on things, sometimes plucked out of thin air. For example, you might own a stock trading at £1 and set a target price of £2, deciding this is what it’s ultimately worth. Chapple says the danger is that you’re far less likely to take your money off the table at, say £1.80, in the hope of making just a little bit more profit. Or you might decide that bitcoin will net you a million and refuse to sell until it does. There’s no such thing as a “right” number, but it’s never wrong to take a profit.
These are just some of the biases of investors can fall into. You will undoubtedly have a few more of your own, so make sure you are aware of them. Bad investment habits aren’t just embarrassing, they’re expensive.
According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…
And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...
It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…
But you need to get in before the crowd catches onto this ‘sleeping giant’.
harveyj has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.