As an investor, making the right decisions at the right times is crucial. Yet, this is easier said than done. With an incredible amount of data available on your laptop, TV, and phone, investing decisions can get clouded by noise.
In addition to this vast information, decisions also become susceptible to biases. If these biases drive your decision-making process, it’s highly likely that you’ll make the wrong choices.
Let’s consider some of the common investing biases.
Self-attribution bias: Investors afflicted by self-attribution bias often credit their successful outcomes to their own actions while attributing bad outcomes to external factors. This habit frequently leads to overconfidence. Beyond a certain point, it becomes a form of self-justification, instilling the belief that they can always be right. Unfortunately, this mindset can prove detrimental to their investments.
Herd mentality: This phenomenon occurs when investors follow others instead of relying on their own analysis and risk appetite. It often stems from the fear of missing out, resulting in investors building riskier portfolios that may not align with their risk tolerance. Many tend to emulate famous investors without delving into the depth of research these individuals undertake before making investment decisions.
Trend-chasing bias: Investors often chase stocks that have shown strong performance, believing they will continue to perform well in the future. Certain sectors gain sudden popularity among investors, like the recent surge in interest towards small-cap stocks, driven by increased flows into small-cap mutual funds due to their higher returns during that period.
Loss Aversion: People perceive gains and losses differently. Losses tend to be remembered more vividly than gains. For instance, avoiding a loss of Rs. 1000 feels better than gaining Rs. 1000. This psychological tendency explains why many investors hold onto losing stocks, reluctant to realize losses, often resulting in numerous worthless investments in their portfolios.
So, is there a way for investors to avoid these pitfalls and improve their investment decisions?
The availability of information often becomes more of a curse than a blessing in investment decision-making. Investors tend to overanalyze specific stocks or mutual funds, leading to confusion amidst a plethora of comparison data. It’s better to define limited metrics and base decisions solely on those metrics.
It’s crucial to remember that there will always be contradictory views on any stock, as the market operates on the interplay of demand between buyers and sellers. Many investors are swayed to buy or sell based on recommendations from prominent brokerage houses. Yet, there are others advocating the opposite. A savvy investor adheres to their buy and sell framework, cutting through the noise by remaining impervious to news or reports.
Having a framework tailored to your investment style and horizon is essential. Consistently adhering to this framework yields better returns than changing strategies based on market noises. Shifting styles from one approach today to another tomorrow can jeopardize your financial health.
Additionally, learning to ignore daily fluctuations and distractions is vital. For instance, how fluctuations in crude prices or election results may affect your portfolio. An investor must consistently review based on their research, absorb relevant information, and filter out the noise. Only then can they progress towards becoming a shrewd investor, attaining returns higher than the average investor.
ABOUT THE AUTHOR
Ketan Sonalkar (SEBI Rgn No INA000011255 )
Ketan Sonalkar is a certified SEBI registered investment advisor and head of research at Univest. He is one of the finest financial trainers, with a track record of having trained more than 2000 people in offline and online models. He serves as a consultant advisor to leading fintech and financial data firms. He has over 15 years of working experience in the finance field. He runs Advisory Services for Direct Equities and Personal Finance Transformation.
Note – This channel is for educational and training purpose only & any stock mentioned here should not be taken as a tip/recommendation/advice
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