Most investors I’ve observed are attentive and watchful when it comes to their own portfolio. Any endeavour which involves money has both ego and pride tied to it, and is as much a psychological exercise as it is a financial one. But some investors end up tripping over themselves because of their own habits and emotions, and they find themselves constantly losing money when investing. Here are three reasons why.
Acting on hot tips and rumours
Instead of doing proper research and reading up on a potential investment, losing investors tend to jump from hot tip to hot tip – they’re always trying to find the “next big thing.” What these investors probably don’t realize is that such behaviour is akin to gambling at the casino, and most of the hot tips will end up being unsubstantiated rumours which would lead them to financial losses.
Some of these investors like to chase up stocks which have experienced sudden price movements without bothering to understand the business fundamentals of the stocks in question and whether these prices make sense in relation to the fundamentals. When reality hits, share prices of rocketing stocks can crash back to earth, resulting in devastating losses.
Acting on emotions rather than logic
I recently wrote two articles (see here and here) on psychological biases that can affect our investing. If we neglect to take heed of these biases, we end up acting on our emotions, buying and selling recklessly, rather than being calm, rational and objective.
An over-confident investor may assume that he can time the market perfectly; the reality is that he may end up racking up a huge bill of trading commissions due to his frequent trading. An investor may also easily fall prey to anchoring bias when the share price of his investments fall, resulting in him hoping for the share price to exceed his buy price before he even thinks of selling. Such examples are common and it goes to show that if we are not cognizant of our own foibles, we will end up sabotaging ourselves.
Not understanding what the share price implies
In a previous article, I wrote about how the role of expectations influences share prices. Investors who do not understand what is being “priced in” may end up buying on good news and selling on bad news, which is an instinctive reaction but which may not always be the best course of action.
Share prices incorporate all manner of news flow and may also factor in either excessive optimism or pessimism. Therefore we have to be acutely aware of what’s incorporated in the share price before we act. If business reality differs significantly from undue optimistic expectations, a crash may result.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.