What do investors believe they can do but can’t? (Part 2)

In continuation with our previous post, following are a few situations of what we think we can do, but probably can’t:

• Ignoring an attractive bad investment story: Generally, a bad investment comes with an attractive story. At first, we ignore the story and we think that only other people will fall for such a story. But after some time, the story starts building. We see people invest in it, and we feel that it’s a good growth story. Eventually, we end up investing in it. As the basis of the story falls out, the investment loses its value, and we end up losing our invested capital. Most investors feel that they won’t fall for such stories, but they end up falling for them.
• To be a long-term investor: Long-term investing is very difficult to do, but it also rewards greatly. Doing very little seems like an easy task. But the temptation to act is so often overwhelming. Acting a lot, and doing something is often the opposite of doing very little when it comes to investing. Every day brings a new story, a new doubt, and a new opportunity. There’s always a new reason to be a short-term investor. Many feel that they can be long-term investors. But only a few people can do it.
• Benefit from extremes: Most of what we witness in financial markets is just noise, but extremes matter. When performance, sentiment, and valuations are at extremes (either positive or negative) the opportunity is for investors to take the other side; Yet, many investors are afraid of losing their capital. They feel that being part of the crowd will save them from taking wrong decisions. Such investors don’t benefit from the extremes of the market.
• Overcoming terrible odds: Investors frequently make decisions where the odds of success are incredibly poor. We think that we will make money by investing in a star fund. But we forget that we are looking at the historical performance. The same performance may or may not repeat. There are many more factors that might have resulted in the success. But we invest without considering these facts.
• Find the ‘one’ investment:Investors are aware of the benefits of diversification. But it feels a little boring and represents an admission of our limitations. We would prefer to find the ‘one’ investment that will transform our financial fortunes. Whether it be a stock, theme, fund, or ‘currency’. Such ambition may not end well. We feel that we may find that one investment and make a fortune. But diversification proves to be more beneficial.

The author concludes that being humble about the challenges of financial markets and aware of our circle of competence is very valuable and an investor should avoid becoming one’s own worst enemy.

Source: behaviouralinvestment.com

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”