Our co-founder Kent Kwan reveals his top three biases to avoid when developing a successful investing mindset. (Reading time 3:07 mins)
This information does not take into account your personal objectives, financial situation or needs. You should consider if the relevant investment is appropriate having regard to your own objectives, financial situation and needs.
If you think successful investing is all about the technical know-how and being a finance whiz, you might be pleased to know it’s only half the picture.
A truly successful investor, much like any person at the top of their game, embodies a particular psychological mindset that guides their decision making.
While it’s crucial to understand the basic technical principles – how to value a share, assess its growth potential etc. – knowing the broad, fundamental ideas behind the world around you can take you even further.
Whether it’s human psychology, the economy, or global markets, maintaining an awareness of factors outside of the investments themselves helps you make less emotional, more rational decisions.
Rational, sound decision making involves shaking some natural tendencies we have as humans that tend to cloud our judgement.
Let’s take a look at the main culprits holding us back from adopting the mindset needed for success, and how to avoid them.
1. Can’t handle the thought of losing
Do you often hear people say they hate losing more than they love winning?
We tend to feel more emotional when we lose rather than win. Our natural inclination towards preferring to avoid a loss over securing a similar gain is called loss aversion.
Anyone who has avoided doing something about a bad investment has faced loss aversion head on. They know the emotional pain of selling an investment that realises a loss.
However, selling for a loss can be the right thing to do if you believe the money can be used for better investments elsewhere. Unfortunately, most investors tend to hold on and wait (or perhaps hope and pray) for their bad investments to improve.
Don’t: hang on to losing investments in the hope that the share price will appreciate, just so you don’t have to feel the pain of realising an investment loss.
Do: ask the more important question of whether you can use the money from selling an investment to get better risk-adjusted returns elsewhere.
2. Give in to anchoring
Do you know someone who didn’t buy an investment because its price had gone up too much? Perhaps you know people who start buying shares in a company because the price has gone down a lot recently?
Both are examples of our minds deceiving us, and is more commonly referred to as anchoring. It’s when we anchor to a reference point, such as a historical price, when making an investment decision.
Retailers use this against customers all the time. For example, they might increase the standard price of some items in a store, but increase the discount.
Customers feel like they are getting a bargain at 50% off the higher standard price, instead of 25% off if the standard price was unchanged.
Don’t: only view large up or down movements in share prices as a measure of whether a company’s share price is expensive or cheap.
Do: work out what the value of the company is first, and then compare it to the share price.
3. Fall victim to tunnel vision
When you wish something to be true, you believe it to be true, and only seek confirmations of this truth you’re indulging in a firmly implanted mental habit called confirmation bias.
In an investment context, this means only considering information that supports your investments and disregarding all other views. For instance, a bitcoin investor may actively avoid reading news about imminent government crackdowns for fear it puts their investment in a negative light.
It’s a common psychological response successful investors have learned to avoid. And you can, too.
Don’t: get stuck in an investment echo chamber that purely reinforces what you already know/want to be true.
Do: put your scientist hat on and actively seek to understand the perspective of people who don’t share your view. It’ll help you identify risks you may have overlooked.
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