These are some characteristics that an investor could have. It’s important to be mindful of these to ensure you can reduce the risk for losing money in your portfolio.
Overconfidence:
Most investors think their top shit when investing in the market. They think they are better than any analyst and can predict the market, but the truth is they can’t. They become overconfident in their judgement which leads to underestimated risk.
These investors act on emotions instead of facts which can reduce their returns and increase their risk.
Self-Attribution Bias:
Investors will take credit for successes and blame others for failures. Investors will follow information that supports their beliefs and disregard conflicting information. This results in poor judgement when investing in a company. They tend to ignore information that contradicts their beliefs.
Being overly confident and having a self-attribution bias will cause an investor to trade more often than they should. They trade more and earn lower returns.
Why is trading too often bad?
If you have an investing account that charges you a fee (brokerage fee) every time you sell, well that fee adds up. Also, if you’re not investing in a tax-free account, you are getting taxed every time you sell a stock with a gain associated to it.
Representativeness:
Some investors believe that Tesla will increase to 1,500 dollars per share. They tell themselves that it’s going to happen because the stock has been increasing and have such a strong belief associated to it. They underestimate the effects of random chance. Yes, it may be possible that the stock reaches 1,500 but it’s not likely. Also, if you wait for it to reach that target you might miss a great opportunity to sell at an all-time high. We can never be sure that the stock will go to 1,500 dollars, but we can earn a great profit by being reasonable.
This also works the other way; some investors may hold off on selling a losing stock that is going nowhere. Them holding off results in them losing even more money.
This is somewhat like narrow framing; which is when you analyze a situation while ignoring the larger context.
Familiarity Bias:
Investors tend to buy stocks that are familiar to them without doing research to see whether it’s a good or bad investment. Yes, you can still generate a profit from this, but it’s riskier and is based on chance.
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