Today I read about the 3 mistakes that all investors make or are tempted to make.
The 1st one is called “availability bias” which is where an investor who has seen markets crash or has been burnt in a market meltdown, feels that since it has happened in the past, it is likely to happen again.
The 2nd is “loss aversion” where one sells too soon to prevent a loss. Behavioral scientists tell us that a person is sad more when he loses $10,000 than happy when he gains $10,000.
The 3rd is the “probability neglect” where human beings tend to focus on the worst-case scenario and not the likelihood that such a scenario will come to pass.
There is one more namely “disposition effect” in which one closes a position that has appreciated a bit while holding on too long to those that have depreciated.
Being the eternal optimist I am, I have never been the victim of the 1st and the 3rd.
I probably have been down the 2nd; I say probably because I do recall, as I do not for 1 second, dwell on my weaknesses and failures.
I have come to realize that being an active investor is perilous to one’s financial well-being and takes a toll on one’s mental health. It is easy to succumb to the temptation being a trader when you have gains of 3 5/16 times monthly income one day followed by loss of 3 7/16 times monthly income the next day. And once you go down that slippery slope, there is no escape from financial ruin. A man could be 60 and may have started afresh several times over a period of decades, each time resolving to beat the odds and trying to time the market, failing and ending up bitter, cynical and distrustful.
I believe that the value of my portfolio is hardly influenced little by market events and is driven almost entirely by other investors getting too greedy pumping up the market or getting too fearful and bailing out of markets. I continued to believe that even as I watched a complete reversal of the market yesterday from slightly negative to hugely positive on plans to link the Hong Kong and Shanghai bourses. And that “market event” today was subsumed by Wall Street’s rout on Thursday.
I am so pleased that I have learned to be immune to these tragedies as I read and re-read Buffett’s quote “I buy on the assumption that they could close the market the next day and not reopen it for five years.”
Research has it that people who received frequent news updates on their investments earn lower returns than those who get no news. Now, I cannot imagine not being current with financial news but if could not contain myself from reacting to news, I would want to make it difficult to act. I would go with the Dogs of the Dow or SPY or a low-cost ETF. No fund manager is going dance to the market’s tune or march to his personal or firm’s drum with my money.