It’s so easy to think of the stock market as something “out there” in the sense of being outside of us … even objective. It’s data driven … and mathematical. It doesn’t get any more objective than that, does it?
If you’ve been investing for any considerable length of time then you know that there is also a very tangible subjective aspect to successful investing. It is so tangible, in fact, that it is arguably the most important aspect of investing that the self-directed investor needs to consider.
If you don’t believe me then just ask your local financial therapist.
Wait. What? Seriously? There really are financial therapists?
In fact, in 2009 the first professional association of financial therapists was officially formed – the FTA … Financial Therapy Association. You can check out their website upgrade your membership here.
There is even now a Journal of Financial Therapy which you can check out upgrade your membership here.
What exactly is financial therapy? One source from the FTA described it as “the integration of cognitive, emotional, behavioral, relational and economic aspects that promote financial health.”
There’s a lot to consider in that description.
I mention all this, not because I think that you’re going to find a lot of helpful resources from the FTA. The FTA is, after all, focused primarily on providing resources and services to financial advisors who are finally realizing what I’ve been saying for 10 years now … the “individual” part of individual investors matters.
I mention all this to impress upon you that this stuff is serious and that every investor needs to factor it into their plan for success in the markets. Yes, investing is partly an information challenge. But it also has a very personal and subjective aspect to it as well.
I recently came across the below graphic from Business Insider.
It beautifully captures many of the personal behavioral biases we independent investors must face every day. I know that the detail will be hard to make out but you can access the full article here.
Below are some of the most common dangers I see for investors.
Before you read my comments on each bias, please read the summary from the Business Insider description first.
- Anchoring bias (#1)
– We constantly “anchor” to our original purchase price, as if it were some cosmically meaningful price. It isn’t. It’s just your purchase price.
- Bandwagon effect (#3)
– I don’t think that this one really requires much elaboration.
- Confirmation bias (#7)
– This one is so seductive. We want to be right. We want to be smart. It’s effortless to give the information priority that confirms that we are both right and smart.
- Outcome bias (#11)
– Judging your investment decisions by whether or not you made money or lost money is certainly part of the story but it isn’t the whole story. You need to judge the process that you used to create that outcome. Is it repeatable and reliable?
- Overconfidence (#12)
– The smarter you are and the more accomplished you are in other areas of your life, the more likely you are to lose money in the markets, if you’re not careful. Overconfidence is the single biggest contributor to underperformance. Of course, there are plenty of people out there that are happy to make money off of your overconfidence.
- Recency (#15)
– Just remember that the latest piece of “news” that you hear from the media about one of your investments is likely only a small part of the full story – even if the media would like you to believe otherwise.
Of course, as a TradeStops subscriber, you’re already way ahead of the game.
As one well-known analyst recently put it, , “TradeStops is the only tool that’s out there that was built from the ground up to help actual individual investors maximize their returns. Period. Full stop.”
I couldn’t agree more … but it’s also helpful to understand what we’re up against as investors so that we’re ready to effortlessly make the tough decisions when the time comes,
Richard M. Smith, PhD
CEO & Founder, TradeStops