Beware of the precious things: becoming a better DIY investor
Richard ‘Greediz’ Gould has been a DIY investor for more than twenty years; here he shares some of the classic DIY investing mistakes that may have cost him dear over the years, before he ‘had a word with himself’.
‘Looking back, I was pretty impressed by myself; I’d made some easy money by getting lucky on the stockmarket, I learned the lingo and had the trappings to show for it. I say lucky, because that’s what it was – I had no overall strategy or methodology, I was punting for what I believed were perfectly justifiable reasons, and fortunately coming up trumps.
I had a good job, the car was on the in and out drive and the watch was fully on show when one night I had what I imagine was a panic attack; what if I lost it all tomorrow? I had no safeguards, and I didn’t feel in control, so I set about becoming a good DIY investor and the first thing I tried to do was to eliminate the classic mistakes that many make when they allow their hearts to rule their heads.
DIY investing is not for the faint hearted; making your own investment decisions can be tricky and a potential nightmare if you allow emotion and bias to cloud your judgement.
To coin a phrase, what is required is ‘strong and stable’; wild and whacky just delivers a roller coaster ride, and the night sweats I encountered, so if you are determined to give it a crack on your own, here are some of the most common mistakes DIY investors make that you should avoid at all costs:
Following the herd
Self-directed investors are often characterised as buying high and selling low and part of that is due to the temptation to join a movement once it is established and thereby either buy after others have bought, or hang on in there long after they have cashed in.
A number of websites allow you to follow, or indeed mimic trades made by people you trust or admire and there is no doubt it’s tempting to simply copy people who seem to know more than yourself.
Sometimes investment opportunities come with celebrity endorsements; I once piled into a beachfront development in the Turks and Caicos Islands, due in no small part to the fact that two very high profile footballers were endorsing it.
‘probably my biggest ever investing own goal’
It transpired that they had lent their names on the promise of a prime piece of real estate at bargain basement rates once the development was funded and complete; of course it never was, and that was probably my biggest ever investing own goal.
The lesson? Don’t follow someone in if you don’t know their rationale for trading, and their real view on an investment.
You might take a tip for the Gold Cup from the bloke with the Bentley at the golf club, but when it comes down to long term wealth creation and preservation, it’s always best to do your own research instead of blindly following other people’s advice.
The presence of professional investors or public excitement may form part of your decision-making process, but be aware of possible hidden motives or herd mentality.
Celebrity endorsement or not, don’t let others dictate your decisions, particularly if you are being lured into dangerous waters such as a cryptocurrency.
Not being rational
It is tempting to focus on information that confirms our current views and discard that which challenges or contradicts; this is called confirmational bias as we seek to justify our beliefs.
In many respects this is reflected in the recent Facebook privacy scandal, where the content a user was shown was filtered based on their existing viewpoints and this bias can also occur when investing.
If you decide you want to invest in the local micro brewery because you really rate their produce, you are likely to then give more weight to any information that confirms your current view such as positive articles or endorsements, and ignore any information which challenges your view, such as an inflated price for the shares.
‘confirmational bias as we seek to justify our beliefs’
If you initially see a lot of positive support, it may cause you to overlook any negative material that you discover as you dig deeper.
That is why it is important to establish a plan in advance and decide what relevant information you need in order to make a good decision; don’t leap in unless you can confirm in a rational way that you can tick all those boxes without letting information from one area influence another.
Don’t let short-term noise or your initial views distract you from making objective long-term investment decisions; a sudden spike in the price of a lacklustre stock does not necessarily mean that something has finally clicked and the management are now equipped to deliver solid long term improvements.
Beware of the precious things
There is a well-documented psychological bias that identifies the fact that those that own something attach significantly more value to it than those that don’t.
This can lead to investors holding onto and selling stocks they own too late because they have an unreasonable view of the price.
This emotional attachment is potentially very damaging because it prevents a rational assessment of a situation; a simple exercise is to look at an asset you own, ignore any personal factors or budgetary constraints, and decide whether you would buy more at the current price – i.e. refusing to sell at a price that you would never buy more at.
‘refusing to sell at a price that you would never buy more at’
If the answer is no – it’s possible your attachment of ownership might be clouding your view on what a fair price is; would you be happy to buy a used car at the price on the screen?
Even the best investors sometimes see biases in their decision making, usually after the fact, but recognising that these emotional factors may be influencing your decisions may be the first step towards becoming a better investor.
Our brains are tricky things to control but learning about these pitfalls made me far more measured in my approach to investing, and as a result I feel far more in control.
I have literally applied a model and a logic that I apply to any potential investment; I don’t exist in a vacuum and very much enjoy some of the banter and indeed wisdom that is exchanged on Twitter, but I know that when I do make a trade, it is right for me, and I’m sleeping a whole lot better!
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