As featured in the Herald Sun – Friday 7th October 2016.
By David McCulloch – Market educator and consultant to Share Wealth Systems
Are you a punter or a pro?
As we approach the Spring racing carnival in Melbourne it’s timely to reflect on an interesting study done by a pair of Canadian psychologists. Their study documents a fascinating aspect of human behaviour at the race track which has clear parallels to what often occurs to many self-directed investors. Just after placing a bet at the racetrack, people are much more confident about their horse’s prospects of winning than they were immediately before laying down the bet. Nothing to do with the horse changes, but in their own mind its prospects now somehow seem better now that they have placed their bet and received their ticket.
Like so much of investing our beliefs are central to our longer term success, and in this regard one of the key reasons for the race-goer feeling more upbeat afterwards is that they now appear to be consistent with their initial decision making. Much of this has to do with a very strong desire to justify each decision we make in life. If the end result is a positive one then we are happy and will continue to follow a similar process. On the other hand, if we are wrong we will often refuse to let go and move on, trying to justify everything as to why it was such a good choice. Listen carefully to the conversations next time you visit the race track this Spring. Look at the faces of those sweating on the outcome of each race, the highs and lows.
Imagine being like that with your investing, swinging from emotional highs to lows every time you choose your investment. At least at the races, you can only lose your initial stake that is, your original bet. In the markets, most investors do not have a clearly defined limit for their losses, and this creates more mental anguish when their selection falls way behind the field, so to speak. The mental anguish becomes a cycle and the end result is that investors are continually fuelling themselves with a set of faulty beliefs without actually knowing it. Instead of following a proper game plan or trying to learn from past mistakes, many will spend their time trying to justify their lack of action. (Think… HIH, Onetel, Babcock & Brown, Gunns, ABC learning etc..)
So before heading off to the races this year, set yourself a limit and stick to it. Be comfortable with your losses and make sure you have plenty left at the end of the day. Likewise if you have recently taken over the reins of your superannuation, strongly consider how your beliefs which directly influence your actions might impact on your returns into the future. Our market has basically gone sideways for the last 12 months, so if you’ve been losing more than you’re comfortable with, it may well be as a result of inappropriate investing beliefs. How might those same beliefs lead you to act when things get really tough? Something to consider I’m sure.