If you’ve set your course and aim to make a million from shares, there could be one barrier above all others that may stop you from achieving your goal.
And it’s nothing external at all. The problem is likely within you – locked inside your own head. It could be that to achieve great results in the stock market, you need to find the problem and get it out!
You could be your own portfolio’s worst enemy
Right now, you could be your own portfolio’s worst enemy. I reckon the biggest barrier to successful investing is the mind traps we all tend to fall into. As living, breathing, emotional human beings, we’re all susceptible to these sneaky bandits that creep up on us and steal our success in the markets.
One particularly nasty little predator is a thing psychologists call Groupthink. It’s a dangerous trap that affects our decision-making abilities. And it can latch onto our often-subconscious internal need for social identification. Usually, when we fall prey to Groupthink, we aren’t even aware it’s happening.
But it’s easy to fall in line with a consensus view that overwhelms voices of opposition. Often, the consequences of going along with Groupthink can be disastrous for your portfolio. It happened to me in 2007 and it could happen to you now. So be careful.
My horrendous investing mistake
By 2005, I was well-versed in the principles of successfully investing in cyclical companies as set out in the books of Peter Lynch, the one-time super-successful fund manager in the US. In 2005, I suspected cyclical sectors, such as banking, housebuilding and retailing, were trading close to the top of an economic cycle.
However, by 2007, I had a clutch of cyclical stocks in my portfolio – just in time for the horrific plunge that followed the credit crunch. How did that happen? The answer is, I’d allowed Groupthink to soak into my brain. I’d been hanging around too many bulletin boards and reading too many articles. And everyone else seemed to be chanting a similar message – housebuilders, retailers and banks look cheap. Everyone else seemed to be loading up with their shares. And so did I in the end.
That was a big mistake on my part. And it was all the worse because I ‘knew’ better. The terrible performance of my portfolio following my decision to buy those shares was entirely my own fault. But it was striking to me that I’d ended up going against my earlier conviction. And that fact prompted me to self-analyse and search for ways to stop myself wandering off track ever again.
Act on your own advice
I reckon the best way to guard against the effects of Groupthink is to firstly listen to, and act upon, our own advice. After researching and studying an investment opportunity, the best thing you can do is to follow your own instincts. Secondly, tune out bulletin boards and excessive market commentary from other ‘voices’. The best source of information is the news flowing from the companies you’re interested in.
Sadly, most private investors fail to beat the market. In many cases they underperform. So, if you want to outperform and make a million from shares, I reckon you should do your own thinking and avoid Groupthink.
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Kevin Godbold has no position in any share 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.