For most people, investing is simply about making money in the stock market.
However, avoiding losses can be just as important as making gains. If we can reduce the frequency and severity of our investing mistakes, we may just set the stage for us to generate good returns in the stock market.
Mistakes can come in many forms. The hardest ones to avoid may be psychological in nature.
1 and 2: Confirmation bias and Anchoring bias
3. Hindsight bias
In his book Your Money and Your Brain, financial journalist Jason Zweig quoted Nobel prize-winning psychologist Daniel Kahneman regarding the hindsight bias:
“People distort and misremember what they formerly believed. Our sense of how uncertain the world really is never fully develops, because after something happens, we greatly increase our judgement on how likely it was going to happen”
Our distorted memories in the stock market may prevent us from learning from our own investing-blindspots.
That’s why keeping a journal of our own investing thoughts is a simple but critical move in gaining awareness of our own behavioural biases and tendencies.
For instance, writing out the thesis for a company that we plan to buy would be one way to keep ourselves honest. An example of an investment thesis can be found in the bull and bear arguments that we’ve made for a company like Comfortdelgro Corporation Limited (SGX: C52).
By writing down our investment thesis, we can compare the actual business results in the future with our own thoughts when we invested in the company. That way, we may be better at identifying blindspots in our investment process and improve on it.
A Fool’s take
Some mistakes can be obvious, and some may not be as obvious.
The trio of biases above may fall in the latter form of mistakes. If we can be aware of our own biases, we may save ourselves from mistakes in the future that may have been avoidable.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn't own shares in any company mentioned.