Can you even trust yourself?
When it comes to investing, the truth is that we are all our own worst enemy. Behavioural Finance and personal experience has shown that our actions are dominated by an emotional side of the brain that is ill-equipped for the cool analysis required to win consistently in the markets. Like the best investors in history, we need to become more Vulcan in our approach to the markets to have any chance of long term success, and learn to act contrary to our own nature, which is poisoned by fear and greed.
The City 'quants' learnt this lesson decades ago, and prey on naive investors by stripping all emotion out of their decision making. We have designed our suite of tools to help the individual investor compensate for our own behavioural tendencies and Vulcanise their decision making.
There's an excellent list of bad behavioural tendencies here - in summary, these include:
- Not having a Plan - there are many approaches that work in the market, but you've got to have a plan and stick with it or fall prey to your whims. By sticking to a time worn investment strategy and firm set of criteria as the first point of your research you will improve your results.
- Selling when terrified, and buying when overconfident - this is the worst philosophy for investing in the markets! You have to act contrary to your instincts to win consistently. When in doubt, a ready made plan of action can pay huge dividends. Reassess your investing criteria to see if current investments still match up otherwise move on.
- Overconfidence - It has been shown in many experiments that the majority of drivers think themselves better than average - Over-confidence is a widely held human trait. Save yourself from investing in low quality 'story stocks' with high financial risk by educating yourself about the qualities of strong stocks. There are many rules of thumb that can be used to highlight low quality securities including some of the tools on our Stock Reports.
- Confirmation Bias - Have you noticed that, as soon as you buy a stock, you start looking for reasons why you are right, and dismissing contrary opinion? Humans generally only look for confirmation of their original decision. The greatest investors such as George Soros consistently searched for contrary opinions. In your own investing, you can get real by seeking out the true financial realities of your stocks, scanning checklists for red flags and opening your thinking to public criticism (not everyone with an alternate opinion is a troll!).
- Following what Experts Say - All too often people invest on a hot 'tip' without stopping to wonder if there's an ulterior motive behind it! Brokers forecasts have been shown to be out by an average of 46% on a 1 year perspective! Stop listening to Guru tips, and start investing according to time tested investment criteria. While bulletin boards can be great places to receive feedback on your investment ideas and pick up crowd wisdom, they can also be dangerous places where inexperienced investors follow Pied Pipers!
- Information Overload - Excessive information and newsflow has been shown to lead to worse decision making as they lead to overconfidence. It's been shown in studies that restricting your investment criteria to a minimal list can dramatically improve your results. Less really is more!
- Belief in Stories - Hot investment stories are like the Sirens singing sailors to shipwreck. Odysseus got his crew to block their ears with wax for a reason. By starting first with a quantitatively generated list of stock ideas, you can then check the story second. The story should confirm the statistics!
The best offence is a good defence and many of the tools you need to defend yourself you can find right here at Stockopedia. We have developed a number of Vulcanesque quantitatively determined tools for investors, including Stock Reports, investing checklists, stock screens and valuation tools. We think they are the best tools for individual investors on the Web and we'd love your feedback.