Teaminvest Co-founder Professor John Price, recently recorded an informative 4.5 minute video about the behavioural biases that often block rational decision-making about investments.
It’s titled “The 4 Diseases”. In the video he explains the four common behavioural biases and fuzzy thinking affecting the way we assess investments. He calls them:
Click on John's pic
It’s titled “The 4 Diseases”. In the video he explains the four common behavioural biases and fuzzy thinking affecting the way we assess investments. He calls them:
- Get even-itus
- Consolidatus-profitus
- Trade-a-filia
- FOMO
Click on John's pic
Regards
NOTES: Stock selection - Read the annual reports - Read all the analysts reports - Visit the stores or use their products and services If you find that at the end of the day, the performance of the portfolio is not that good, or mediocre at best, in many cases there are various reasons. They often have not taken into account behavioural biases, the sort of fuzzy thinking that is automatically in their mind that blocks out their rational decision. These are the 4 behavioural biases, which we refer to them as: |
- Get even-itus
- Consolidatus-profitus
- Trade-a-filia
- FOMO
The disease of hanging onto a stock when the price has gone down until you can get even. "Don't worry dear, it is going to come up back again." The problem is, if the stock has gone down, the chances are it is going to continue to go down and best it is going to be a mediocre investment. It is much better to face the fact that you have a loser, you lost money and to move on.
Consolidatus-profitus
This is the opposite to get even-itus. This is the disease of always taking a profit when the price goes up. It looks great and you can tell your friend at the dinner party that your stock went up 20%, 40% or 50% and you sold it. The problem is what you are going to do with that money. Studies have shown, on average, people who sell just to take a profit end up putting their money back into the market in a stock that underperforms the one they got out of. #
Get even-itus and Consolidatus-profitus are two sides of the one coin; generally hang on to losers and sell winners. The opposite would be better, that is, sell your losers and hold on to your winners. They water the weeds and cut the flowers. It would be better they water the flowers and cut the weeds.
Trade-a-filia
This is the disease of just loving to trade. Most people who would never dream of going to casino betting on roulette or any of the casino games or machines,yet when they are on their internet and looking at their stocks, they trade far too often. It is so simple to trade on the internet and they get drawn into it. But studies have shown that on average, the more a person trades they worse they do. I am not referring to their transaction costs but actually their performance diminishes. Instead of looking for great companies that are going to make you money year after year, they think they can get a short term profit. In the short term, the share prices are much more random than most people believe. So this is a disease of trading too often. In this regard, women are better investors than men, because overall, women trade less than men.
FOMO
This is the 4th disease, the FEAR OF MISSING OUT. You read about a particular stock and its price is going up and you think, if I don't get in now, I am going to miss out, instead of taking your time and evaluating the stock properly.
These 4 diseases really work together and at best give you a mediocre performance that is far far below you optimal performance.
You should work to eliminate these 4 investing biases or diseases, consciously. Use tight filters to filter out the best companies to concentrate in.
Be alert that you are not slipping into these investment biases. Eliminate these investing biases and your performance will be much better.
http://myinvestingnotes.blogspot.com/2015/06/the-4-diseases-of-investing-evenitis.html
Kevin Wong
Keep long term uptrending winners, avoid ever downtrending stocks and trade less...the better!
2015-06-27 09:48