Does Being Human Hurt Your Investment Results? Part I of III

My friend and fellow coach, Fred Taylor recently wrote an insightful piece on the psychology of investing. Fred makes some great points. He and I both try to warn investors that their own human psychology and their emotions are often their worst enemies. Emotions are very good for survival of the species — but not so good for investors. To see if your psychology and emotions may be affecting the wisdom of your investment decision-making, see how many of these statements sound close to something you’ve said or thought:

“Wall Street’s like a casino but I check my portfolio twice a day.”

“I sold stocks in 2009 because the Fed was printing money. When stocks doubled in value soon after, I blamed the rise on the Fed printing money.”

“I put $1,000 on a hyped penny stock my brother convince me would be the next Facebook. After losing all $1,000, I told myself I was just investing for entertainment.”

“I believe the government is grossly irresponsible for running a deficit however I don’t want to seriously think about how wise I to have taken out my own unaffordable mortgage.”

“I bought a stock basically because it was cheap. When I realize I was wrong, I held on to it because of the company’s good customer service.”

Do any of these statements sound similar to something you’ve done? If so, you’re in the majority. At times, nearly all of us investors do something similar with our investments.  We always want to believe our own investment decisions make sense. So when something we do doesn’t make sense we justify, we fool ourselves into believing there is some method to our investment madness.

Here’s another common investor mistake. It’s call confirmation bias. Confirmation bias causes us to bond with people whose self-delusions look like our own. Those investors who missed the rally of the last four years are more likely to listen to analysts who forecast another crash. Investors who feel burned by the Fed visit websites that share the same view. Bears listen to fellow bears; bulls listen to fellow bulls. We take a narrow view that confirms what we already believe and don’t realize that we’re not acting objectively and thinking clearly.

Before long, you’ve got a trifecta of failure: You make a bad decision, rationalize it by fighting cognitive dissonance. and reinforce it with confirmation bias. No wonder the average investor does so poorly.

Here’s one solution to avoiding these types of money-losing scenarios. It comes from a successful hedge fund manager and billionaire, Ray Dallio.  Ray writes:
“Successful people ask for the criticism of others and consider its merit. Remember that your goal is to find the best answer, not to give the best one you have.”

I tell my clients to take Ray’s advice. Don’t assume your investment opinions (or the opinion of those who agree with you) must be right. Verify. Check the facts. Don’t seek to confirm your opinion but seek to discover the investment truths. Remember what Ronald Reagan said: trust but verify.

I’ll say more on this topic next time. Until then, feel free to contact me. Call me, Gene Offredi, CFP, RFC at 203.453.1017. You can also visit  "http://www.summitinvestorcoach.com/" my website or  "http://www.summitinvestorcoach.com/blog/" my blog.