Everyone struggles with biases when they are investing. Some people fear missing out in a bull-market, some are overly skeptical or pessimistic. Some are seduced by dividend yield instead of dividend payout sustainability. Some can’t bear to pay a difference of $0.05 more for their stock and then lament when they watch it shoot up.
Investing biases. Everyone has one. It’s a matter of having the humility and self-awareness to acknowledge your investing bias and learn how to overcome them that differentiates the good investor from the mediocre ones.
I realise I got a weird investing bias.
I can’t help but buy stocks of businesses that earn money from me.
In other words,
I can’t help but try to earn back the money certain businesses earned from me.
When Peter Lynch talk about buying what you know, and about looking at everyday businesses you come into contact with, I really take that advice to heart.
I would constantly be monitoring which businesses I am spending my money on, and if possible, what other people are spending their money on.
Let me give you some examples.
When I bring my car for servicing, I can’t help but wonder how much Vicom is earning from all of us car drivers.
When I do a transaction over PayPal, I curse at the high transaction fees I incur.
When I create a Facebook or Google ad, I am amazed by how all the dollars add up from small fries like me to form a waterfall of gushing cash for these 2 companies.
When I am messaging on my iPhone, I take a break to look up and see everybody else looking down at their phones too; and I wonder how many people in the world own Apple iPhones…
When I swipe my credit card, I wonder how many more people are switching to digital payments, and how much MasterCard is earning from each transaction.
When I book my hotel through Agoda, I feel Priceline happily earning a cut of my holiday expenditure.
When I buy groceries, I thank Dairy Farm for always being there to provide me with my daily necessities.
And lately, when it came to my realisation that Zouk was moving to Clarke Quay, and that Clarke Quay is owned by Capitaland Mall Trust, I can’t help but find 1001 reasons to buy that REIT.
FINALLY, I am going to earn back all my army salary that Zouk had earned from me many years ago.
This bias has made me own stocks of all the businesses mentioned above.
I decided to do a search for investing biases and here are some I came up with:
Loss Aversion – When you refuse to book in a loss of let’s say 30% but choose to instead continue holding the stock and waiting for the price to rebound.
Overconfidence – This is particularly a male trait. I happen to succumb to this bias very frequently as well. This bias makes you supremely confident in predicting outcomes or making assumptions.
Anchoring – You refuse to change your original investment thesis when new information surfaces. You choose to believe and stick to your original investment thesis which may be outdated.
Herding – You choose to buy and sell and match your investing decisions with those around you. This is natural tendency as humans look to others for confirmation.
Frame dependence – Your risk tolerance changes with market conditions. When the market falls, you suddenly find yourself being unable to tolerate risk. When the market is bullish, you take on more risk. This causes investors to buy high and sell low.
Recency Bias – This bias occurs when you extrapolate recent information into the future. This bias may find its way into your calculations of a company’s valuation.
Confirmation bias – We rush to conclusions in making decisions. We like to think we that we do lots of research and weigh the pros and cons of each investment. In actual fact, we take mental shortcuts when making decisions. This is also another bias I suffer from as I make lots of decisions every day and cannot help but make snap decisions on the go.
Once you recognise your investment biases, you’ll have to take action in quelling or combating these biases.
For me, I try to reduce my overconfidence bias and confirmation bias by holding a large number of stocks. (23 stocks currently.) I have tried holding a concentrated portfolio of 8 stocks but I find that extremely hard to do so. I couldn’t sleep well at night! (But if you are pro enough, go ahead and hold a concentrated portfolio!)
As for my weird investing bias of trying to earn back money from the businesses that earn my money, I’d try to dig out data to show that the products or services sold by the business is widely-used by others as well. I need to get a wider perspective of the business and not limit my decision-making based on my own assumptions or experience. I have to get a grasp of some numbers and quantifiable statistics.
What about you? What’s your weird investing bias? What investment bias do you suffer from?
Let me know in the comments below!
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