This is going to be a short post regarding two common investing mistakes, specifically Confirmation bias and Recency bias. Anyone is prone to falling victim to these, but by being more aware of them there is much less tendency to unknowingly let them guide our decisions.
Simply put this is just ignoring relevant information that goes against our views, and seeking out info that just confirms what we want to believe. We’ve all seen the posts stating “This is going to happen to stock XYZ”, they ignore any facts in the comments refuting their position, and yet, when the stock moves in the opposite direction there is surprise?
The best counter is to seek out information that challenges your conclusion, review the company’s financials/profiles, read opinions that are opposed to your own, and be honest about your motivations. Are you just trying to make a quick trade? Or an investment?
This is when emphasis is put onto recent events and giving less weight to those that have happened in the past. Recency bias makes us think more in the short term. For example, perhaps we come to the conclusion that the market will keep going up? Or down? Or say an investor buys a stock and it drops over 20% in a month, they might be more likely to view all the related investments as bad due to the recent experience. Perhaps a closer look at the balance sheet would have revealed it was the bad one from the bunch.
The point here isn’t to completely ignore recent data and trends. This is often what swing trading can be influenced by! The point is to ensure that your decision making isn’t too heavily influenced by it, trends can often change dramatically. For several months tech stocks are on fire, and then the next few they underperform the rest of the market.
The tendency to think that the most recent strong performers are going to be tomorrow’s strong performers, will often leave you disappointed.
Whenever you hear “momentum” and “trend” always be cautious, do your research. Additionally think less in the short term, craft a long-term investment horizon with your specific investment goals in mind.
Everyone is unique in the way they think and go about their investment strategies, some may be more prone to some biases than others may be. It is important to remember that no one person is an expert, seek out opinions, and if you need more discipline then make yourself a rules-based checklist for investments. Prevent the FOMO.
There are a lot more biases that influence our thinking, reading up on them to be more aware how they can influence your decision making will make you a better investor in the future.
As always thankyou for reading, hopefully this short post got some brain juices going. If anyone has some strategies they use or another common bias they see people falling victim to then please comment. Have a good night everyone.
EDIT: Keep an open mind, acknowledge your shortcomings, be open to CONSTRUCTIVE criticism, listen, and don’t sell out of the market before an election because someone “predicted” it was going to drop. No one has a crystal ball.
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.