Mistakes We Make

August 26th, 2009 by 

Ever made a mistake in investing?  Yeah, I bet you have.  I have too.

Everyone has biases which make mistakes possible, the question is how can we recognize them and adapt?  Read on...

The Perfect Investor

If you're anything like me or my peers who write on personal finance topics, you are a do-it-yourself person.  People like us enjoy taking charge of the direction of our own wealth.  Most of us (myself included) aren't certified investment advisers or financial planners, we just take an active interest in money management.  With thousands of books read collectively, even knowing the perfect investing methodology in every situation doesn't guarantee success.

This Guy Isn't Always in Charge (Dave Prior)
This Guy Isn't Always in Charge (Dave Prior)

For me, my roadblock in the past has been uncontrolled emotions.  For whatever reason, I'm quick to anger, and this affects my financial decisions.  I have an intense competitive drive as well, and I really don't like being wrong.  Well, that's tough- even I'm sometimes wrong.  Worse still, I play in the same investing sandbox as everyone else.  The only way for me to manage these emotions when investing is to avoid investing while in certain moods.  Yes, competitive drive may be one of the reasons I invest on my own in the first place, but feeling in a combative mood doesn't work well for me in the markets.  Maybe it's Meir Statman's first point, there are entities faster than me.  I'm fine with that; I'm in it for the long term, not momentarily.  So, when I'm angry or competitive, I either go to the gym or play basketball.  Problem solved.

What would the perfect investor be like?  Like Statman proposes in the article, a boring, unemotional computer.  If you've only got one mood, awake, and can pay perfect attention to the subject at hand, you're bound to be a good investor.  However, you're also bound to have a boring life.  Perhaps my situation can help yours?  Figure out what mood causes you to make mistakes, and avoid investing at those times.

In It For The Long Run

Again, it's easy to say how you would act in a certain situation.  It's also likely you won't actually act that way when confronted with that situation.  Don't take it from me, take it from the Mighty Mighty Bosstones' song The Impression That I Get, "I'm not a coward, I've just never been tested.  I'd like to think that if I was I would pass."  Well, look on the bright side, your assumptions were just tested.  How did you react to the wild market swings of the recent past?  Are you investing at the same clip?  (Assuming you have the same cashflow!)

Investing isn't a sprint (unless you have the time advantage of a Goldman Sachs... back to the author's first point).  It truly is a marathon.  You start when you are young and time is your biggest ally.  You finish when you are older and a special combination of resources and emotions allow you to start retirement.  Even though checking your account balance may be painful, the future is long (remember, even if you're near retirement remember you still need to be investing in retirement.  Don't pull everything out in the first year!) and hopefully better than the recent past.  Did you look at the market volatility as you do a sale at your favorite store or as you do at imminent danger?  If you don't answer a "sale", perhaps a more passive form of investing would be better for you, or perhaps more exposure to less risky assets?

Reader, what are your biases?  What prevents you from being the perfect investor?



PK started DQYDJ in 2009 to research and discuss finance and investing and help answer financial questions. He's expanded DQYDJ to build visualizations, calculators, and interactive tools.

PK lives in New Hampshire with his wife, kids, and dog.

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