Five mistakes even savvy investors make

Nic Andrew, Head of Nedgroup Investments, discusses the behavioural aspects of investing, and highlights five behaviours that can hamper an investor’s rational decision-making.

behavioural aspects of investingThe most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.” – Warren Buffet

People tend to think that investing is a numbers game, but successful investing has a lot more to do with personality traits than most of us realise. There is a large and deeply researched branch of finance which focuses on the behavioural aspects of investing and has highlighted a wide range of human biases that obstruct rational decision-making. Some of the most common topics explored in this field include the following:

Overconfidence

Many investors are overconfident in their own abilities, which leads to investment decisions that are insufficiently researched and not as carefully thought-through as they should be. Related to this is self-serving bias, which is when investors attribute positive outcomes to their own knowledge and skill, while blaming negative outcomes on external factors such as “market irrationality” or unpredictable events.

Recency bias

Most investors have a tendency to think that recent trends will continue indefinitely into the future. As a result, they place too much emphasis on recent trends when making investment decisions, even when they are investing for the long term.

Regret theory

Many investors anticipate that they may regret having made the wrong choice and take this into consideration when making investment decisions. This can make them more risk averse to avoid possible losses, or it can lead them to take greater risks to avoid missing out on good returns.

Loss-aversion bias

It is well documented that investors are asymmetrically biased against losses. This means that most people perceive a loss of R1,000 with far more emotion than a gain of R1,000, even though their actual difference in wealth is the same.

Confirmation bias

Most people struggle to make decisions objectively. They tend to start out with a conclusion or a leaning towards a particular conclusion in mind and then find evidence to confirm what they wanted to believe in the first place. This often involves ignoring or dismissing evidence to the contrary.

At Nedgroup Investments, we have always believed that to be successful, investors should strive to manage their emotions when making investment decisions. This is easier said than done, but being aware of the behavioural factors that influence your thinking can help you make better financial decisions in future. The most important thing is to have a sensible framework and to have the discipline to stick to your plan.

For more on our approach, go to www.nedgroupinvestments.co.za

2 CommentsLeave a comment

  • Investments

    I’m wondering what your thoughts are about some of the banks that offer high interest rates. In particular, Finbond that guarantees their investments?

    The reason i think Finbond is worth discussing is because they have a banking licence just like Capitec.

    It appears that they offer up to 9.5% on fixed deposits.

    Thank you for your time, I really appreciate it.

    • You are correct that FinBond is similar to Capitec in that it makes its money from micro-loans which earn a very high interest rate for the bank.Therefore it can offer depositors a higher rate than an ordinary bank. You just need to keep in mind that micro-loans are riskier types of debt and if FinBond is not managing their risks properly they could suffer severe losses which would affect their ability to repay their depositors. Capitec has an excellent risk-monitoring system in place and has a long term record – FinBond still needs to prove it can manage its risks accordingly. Remember with any investment the higher the return, generally the higher the implied risk

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