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These 10 investment misconceptions impact our ability to make rational investment decisions.
Making investment decisions based on share price behavior is a fool's game.
Before retirement, I would walk through the concourse that ran beneath my office tower and that of adjoining office towers. More often than not, groups of people would be riveted to huge screens that broadcast investment related information. In addition to interviews with ‘pundits’, ticker symbols and their share prices would flash across the screen. I couldn’t help but notice the similarity between this and a casino.
In other parts of the concourse, a couple of the major Canadian financial institutions each had an area where customers could gather to watch investor news channels. Steps away from comfortable seating arrangements were computer monitors where investors could readily access computer monitors to place trades.
The discount brokerage firms of these major Canadian financial institutions are not stupid. They make more money from traders than from passive investors.
I suspect few, if any, trades made by these ‘investors' were based on a company’s long-term outlook. They were most likely made influenced by ‘share price behavior’ and predictions by ‘pundits’ standing to benefit from investor behavior triggered by their predictions.
Learn To Time The Market
Just like predicting share price behavior, learning to time the market is sheer stupidity.
Recognize that no investment strategy is perfect. We all make mistakes and incur losses along the way. The key is to learn and improve continuously.
I like to invest in great companies when they temporarily fall out of favor with the investment community because of some event that does not permanently impair the company; this is not market timing!
In several posts accessible through the Archives section of this site, I disclose purchases made when many investors headed for the exits (eg. Lockheed Martin, RTX, Intuitive Surgical, Nasdaq, Zoom Communications). I know, however, that I cannot consistently perfectly time my investment decisions. In several cases, a company’s share price trends lower following a purchase. In such cases I often add to my exposure because if I had sufficient conviction to invest in a company at a certain price, my conviction is greater when I can acquire shares at a lower price/more favorable valuation.
Trying to time the market based on predictions is a risky game. Instead, adopt a disciplined, long-term investment strategy.
Expend More Time And Effort
Putting more time and effort into what we do typically leads to better results.
Michael Jordan became one of the world’s greatest basketball players because of his relentless pursuit of excellence. Practice, practice, practice.
Continually learning is critical. Increasing the degree of complexity when it comes to investing, however, is not.
In many cases trying harder and paying more attention to our investments often leads to inferior results.
We don’t get extra points for degree of difficulty. Follow the KISS principle. ‘Keep it simple, stupid!’
Strive To Exceed Market Returns
I can’t imagine myself being on my death bed wondering how much more money I would have if I had made different investment decisions over my lifetime.
I don’t concern myself with trying to generate superior returns to the overall market. This explains why I have no exposure to Amazon, Nvidia, Meta, Google and other high flying technology companies.
If my returns exceed market returns...great! If not...no big deal. Over the very long-term, however, I want to generate returns that handsomely exceed the rate of inflation while taking into consideration my risk tolerance.
Employ Anchoring
Anchoring in investing is a cognitive bias where we make financial decisions by relying heavily on specific reference points or historical prices; we tend to place extra importance on the first piece of information we get on a topic, regardless of the accuracy of that data point. Using an arbitrary or outdated reference point can significantly influence perceptions of value, risk, and future price movements thus impacting our investment decisions.
Compare Your Investment Success To Other Investors
We are apt to make extremely poor investment decisions if we are envious of the success of other investors. We are all at different stations in life, and therefore, the comparison to other investors is pointless. Focus on our own goal, objectives, and progress.
Keep in mind the definition of insanity, however, which is the expectation of different results while continuing to do the same things over and over.
If you want to make some changes in life, you have to make some changes in your life.
Setbacks Never Happen
Stuff happens. We will inevitably encounter setbacks if we do something for a prolonged period. This is particularly relevant when it comes to investing.
There will be periods where temporary setbacks will shake our confidence. How we handle these setbacks is a testament of who we are.
Do we throw up your hands in frustration and give up or do we learn from our mistakes and continue to focus on our long-term goal and objectives?
The Importance Of A High Intelligence Quotient (IQ)
Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.
- Warren Buffett
Our emotional quotient (EQ) matters more than IQ. Plenty of intelligent people invest with varying degrees of success. Those who succeed can generally control their emotions.
Success In Other Areas Of Life Impact Investment Decisions
Who we are and our behavior influences our investment success.
Success in other areas of life is no assurance of success in investing. It is a huge risk to assume career success automatically translates to investment success.
Most young investors have no idea how they are going to react under certain market conditions. I see it on social media platforms. People who have never experienced a major correction have no concept of their risk exposure.
At the same time, however, the experience of more seasoned investors can sometimes lead to overconfidence.
Focus On Short-Term Performance
Some investors argue that short-term performance is a time frame of a year or less. I think short-term when it comes to investing is at least 5 years.
Since great company management thinks in terms of how a company is going to perform over several years, I choose to have a similar mindset. In doing so, I find myself thinking more like a business owner and am less likely to fret over an investment’s short-term under-performance.
Final Thoughts
Focus on things that are important to make more rational decisions thus increasing the odds of investment success. Remember that investing is a marathon and not a sprint.
I wish you much success on your journey to financial freedom!
Note: Please send any feedback, corrections, or questions to [email protected].
Disclaimer: I do not know your circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your research and due diligence. Consult your financial advisor about your specific situation.
