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Investing: the many biases that could hamper your success
19 November 2021 | Minutes to read: 4

Investing: the many biases that could hamper your success

By Nigel Credlin

Investing is a life-long pursuit. It may take on different forms as we move through our lives, however the underlying premise remains the same.

At its purest, long-term investing is easy. Our ethos for successful investing – invest with patient capital over the long term – can set you above the crowd if you can faithfully execute it. While this requires hard work, discipline and experience, it is, in essence, very simple, but also incredibly difficult.

Australia is seen as the lucky country to the outside world, however many of us are constantly in a search for more. The cultural phenomenon’s of ‘tall poppy syndrome’ and ‘keeping up with the Jones’s’ as well as social media, all distort our reality and lead us to make some very poor, short-term investment decisions. These poor decisions in part explain the recent rocket that has been placed under the property market. Perhaps this gain is the result of our newly created pursuit of demonstrating our prosperity (debt-fueled of course) on Facebook and Instagram.

In addition to how we feather our nest (cars, houses, expensive toys, etc.), we must also contend with the proven biases that encourage us to stray from the long-term investment path less traveled.

Confirmation bias, loss aversion bias, hindsight bias and bandwagon or groupthink bias are some of the more prominent gremlins we encounter and must manage (not necessarily control) in order to effectively invest for the future. By understanding their basic premise, we can garner the tools to render them redundant.

Confirmation bias

This results from surrounding yourself with data and people who reaffirm your views, leading to a form of investment inbreeding, or your own private investment cult, if you will. It is one thing to have a strong view, to stay the course and have the intestinal fortitude to ride the inevitable waves, but it is an altogether different proposition to hold onto a point of reasoning that has proven to be redundant.

To ensure you don’t get caught in the confirmation bias trap, spend 51% of your time looking into why you could be wrong. This will allow you to hold the course when needed, adjust your coordinates and avoid the looming iceberg.

Loss Aversion Bias

To put it simply, this is ‘fear’. This is the bias we wrestle with on a constant basis. In the context of long-term investing, it catches hold when you have a large gain that you don’t want to risk, or a loss that is too great to rationalise. When we are more concerned with avoiding loss, than we are with obtaining gain, investing becomes a real battle. When it pulls you in, removing your ability to sell, you are left to deal with opportunity cost and the torment of another investment not taken.

If the fundamentals are sound, and the investment thesis still holds, the gains can continue. If the current loss is formed, not by the poor deeds of the company, but by external short-term forces, then staying the course for the long-term may still be warranted. Independent thought is required, coupled with a stiff backbone.

Hindsight bias

This is my favourite. Hindsight bias constantly makes fools of people. Not because they ‘should have known’, but because they pretend they did. In its simplest form, this bias assert that we should have seen it coming – both the good and the bad. In reality, risks that derail an investment are the ones we don’t already know – cue Donald Rumsfeld – they are the ones we couldn’t plan for or mitigate. If that is not a definition of risk, then I don’t know what is.

The only way to deal with this bias is to drop your ego and walk with your head high and eyes wide open, scanning for danger. Investing is about assessing risk today. It is not about abdicating responsibility for past decisions or having delusions of predicting the future. To overcome this bias, it is best to live in the moment with an ego that is big enough to take on risk, but not so big that it is unable to accept the loss.

Bandwagon or groupthink bias

We have all been on a bandwagon and gee doesn’t it feel good! I recall being scolded in jest, “If your friends jumped off a pier, would you do it?” Well back then it was a resounding ‘yes’, and we did it frequently. However, when it comes to investing, this can lead to sub-optimal outcomes. It is one thing to follow the crowd, and another to go down the well-worn path and off the cliff.

Groupthink is not a bad thing if it coincides with your independent analysis. If it informs the 51% of your research and doesn’t blind you to perpetually ‘knowing’ the answers. By holding your own, well considered investment proposition, you will be able to enjoy the ride and still get off at the right station. Viewing markets and investments as a contrarian will assist in breaking this bias as you are constantly ‘looking in’.

Long-Term investing is a simple game. The earlier you plant the tree – the larger it can grow. Investing has many ebbs and flows. It demands your time now, for the promise of future rewards. For hundreds of years, long-term investing has consistently proven to be one of the hardest things to do, even though the concept at its core is very simple.

With guidance and support you will be able to navigate this infinite game and stay on the path less traveled. Despite humble beginnings and unseen challenges, sound investing will make for a life where you are constantly growing, not only your mind but also your wallet.

For advice on the most effective investment strategy for you, contact your William Buck Wealth Advisor.

Investing: the many biases that could hamper your success

Nigel Credlin

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