My 7 major investment biases! What are yours?
Whether we like them or not, everyone has biases when it comes to investments. What are yours? Share them here!
I get asked often -- why do I say 'You should concentrate on the positives' but write more about errors?
Simply because if you are a novice/amateur investor (like me) it is far, far, far more important for you to avoid errors.
For example, I have always warned investors against investing in companies from Hyderabad.
What would have happened if you had listened to me?
Well you would have lost out on Dr Reddy's Laboratories, but avoided Jupiter Bioscience, GTB, Satyam, Nath group, Prithvi... there are tons of them.
So, for most of us avoiding mistakes is very important.
Let me list some of the biases that often happens to me and to most of you I guess:
1. The Endowment Effect
Try telling my dad that we should sell off Colgate or Tata Power.
It just will not register.
He sees the nice five-figure dividend cheques coming -- and these days coming 2-3 times a year.
This is called the Endowment Effect.
If you already have a share, you see no reason why that share should be sold.
It is always nice to believe that the same thing will continue to happen for the rest of your life.
Or your portfolio's life.
2. Ignoring cost of operating
If your broker does not add value to your portfolio, shift to a least cost, safe brokerage house.
However for safety purposes your big portfolio should be with a nice big bank rather than with a small brokerage house.
3. Optimism bias
If we are buying equity, it means we are bullish about the future.
Sometimes we overdo it.
Right now we believe that NaMo will come and work wonders.
If UPA 3 happens, well, well... we are optimists right?
4. Confirmation bias
I attract, read, tweet, and re-tweet only news items that are favourable to me and my beliefs.
5. Recency effect
Funnily I believe the latest report about a company rather than the most accurate analyst.
Worse than that I believe that what has happened in the past two years will happen over the next 22 years!
Depending on whether we support Congress or BJP we can twist market performance to suit our beliefs.
So if the market did well as soon as the Congress government took over, we are happy to say 'see the good work of BJP -- the results are showing NOW'.
7. Blind faith
We develop in some analyst or a fund manager or broker -- and then try convincing oneself that 'I cannot go wrong because 'he' has said so.
Please read, check and understand before you act... even if you read it on subramoney.com :)
What are your investment biases, dear readers? Share them here!
Illustration: Uttam Ghosh/Rediff.com