Know Thyself: 5 Key Investing Biases And Ways To Avoid Being Influenced By Them
1. Overconfidence
Sometimes a good market makes one overconfident and does not focus on adequate risk management. Focusing adequately on potential risks is a good way to keep allocations in control.
Many investors went overboard on midcap. The results are for all to see.
2. Following the crowd
The crowd does have wisdom when it comes to other aspects of life, however in investing whenever the crowd is at a certain conclusion, it is likely to be reversed on account of not looking sufficiently at the facts.
This applies adequately to when markets are raging and when markets are underperforming.
The key thing is to look at a base case and likely scenarios ahead. Many investors are looking at a coalition structure in the coming elections. That may or may not fructify.
3. Greed
Many of us have a tendency to have that extra slice of pizza, despite knowing the impact of it.
This leads us to not be as fit as we should be which I realized after losing 11 kgs in the past 3 months.
Same thing applies to markets. Investors see a category performing and try to add to that category. The right question is “Is it likely to continue? And if so to what degree.
That helps to make better decisions. The days of companies performing without following a sustainability framework in spirit are over whether it is about debt capital, equity capital.
Companies which are not following sustainability practices tend to see a fall in business/share prices.eg: Graphite Ltd has been issued to close down the plant which has led to the fall in price.
Even in a category like secured debentures many of the investors would like a higher rate of interest. However, they sometimes don’t notice the governance level of the company which can cause a permanent loss of principal in the portfolio as has been seen in the past as well.
Key thing is to look at adequate governance and sustainability practices to ensure that capital stays safe especially in a fixed income category.
4. Being driven by intuition
Sometimes intuition helps us to understand where the problem is, however it does not help in taking complex decisions.
Therefore a mix of data and intuition is critical to keep one’s portfolio and sanity intact.
One cannot use one without considering the other. A good practice is using a checklist.
5. Inertia to change old frameworks
All of us are conditioned to behave in a manner according to where we stay and where we live. The 5 people one spends most time with determine one’s financial situation and conditioning.
As a country we are 97% invested in ideas of the past i.e. real estate and fixed deposits which may not help many people beat inflation however it is ingrained in their thought process to have more allocations to it.The key thing which helps one change is the potential benefit or fulfillment on account of making the change. Change gradually and experience what works for you.
The only way to maintain rationality is to understand one’s irrational side. That way one will make lesser mistakes.
