We continue with Michael Mauboussin’s ten attributes of successful investors with another two attributes.
7. Beware of behavioural biases
There are many behavioural biases that you need to watch for.
You can find some of them here.
The presence of such biases shows that investors are human and are, therefore, neither immune nor infallible.
It pays to be aware of these biases to prevent them from tripping us up as we invest.
Economics, investing and psychology intersect to arrive at a discipline called behavioural finance.
This relatively new discipline has been gaining traction as more people become aware of how their emotions can sabotage themselves.
The “rational” model of economics assumes that people make perfectly rational and unemotional decisions.
Behavioural finance, on the other hand, proposes explanations for a variety of observed behaviour that departs from rationality.
Heuristics (i.e. shortcuts) often help us to make quicker decisions under familiar conditions.
The brain loves relying on such shortcuts to save time and avoid repetitive and laborious thinking.
However, when such shortcuts are applied to investing, it may lead us to make erroneous decisions.
Successful investors know they cannot avoid behavioural biases totally, but the key to minimizing their influence is to i) be aware of them and ii) be trained on how to manage them.
Finally, it’s useful to surround yourself with an environment that encourages rational thinking.
To do so, avoid participating in online forums or chat groups where emotions can run high.
8. The difference between information and influence
Information can influence, which in turn creates a feedback loop that feeds on itself.
To illustrate this point, share prices offer information on what buyers and sellers are willing to transact.
However, such prices may also inadvertently convey information on the merits and prospects of a company.
When this happens, the prices then begin to influence other stock market participants who use the share price as a signal for better (or worse) times ahead.
As investing is also a social activity, such influences may lead to poor investment decisions as people get sucked into groupthink, thereby forsaking analytical rigour.
Successful investors should disregard the views of others and do what’s right, rather than what’s popular.
This can be extremely tough as it requires discipline and the ability to stand apart from the crowd.
Disclaimer: Royston Yang does not own any of the companies mentioned.