In my last blog, we looked into what kind of investor you are and slightly touched on some errors Link. Now it is time to see how our minds play with us and affect our decision making as well as look into judgment errors/biases. In investment management, there is traditional finance theory, which assumes that all individuals act rationally and is opposed by behaviour finance. As there is a large quantity of information available online around traditional finance and it is not very applicable in real life, we will spend most of the time talking about behavioural finance.
As you know life is not perfect, we will never be in a position where we know everything about the entity/investment or able to process all available information in the market. Our next subject is based on this idea.
Bounded rationality is looking into individuals decision making with incomplete information. When we start looking into stocks, we will need to make a huge amount of research to be comfortable with investment. However, eventually, we come to the point, where additional information does not help us to make a better investment decision, and it is entirely okay. So you have to satisfy yourself with what you have. Of course, if you feel that there is more fundamental information that needs to be researched, please, do so. Some examples could be that you have reviewed market, company fundamentals, and all directors. However, you cannot get information about inside changes in the business. If you are happy with your research and feel confident about the company’s future prospect, you can invest without knowing this additional info. The decision will not be optimal in traditional finance sense, but acceptable. You should make sure that the price is right as well and you leave some room for error, but we will speak in future blogs about stock selection. Continue reading →
Everyone loves to learn something about himself/herself. This is exactly what we will do in this blog. We will look into your inner investor. Learn what kind of investor you are and what biases you may hold. I am really enthusiastic about this topic and cannot wait to share this knowledge with you. We will start with reviewing standard classification and definitions and then look into some alternative classification. When you look through them you will notice that they are quite similar and based on ability to take a decision, risk tolerance and handle information.
Please keep in mind that with age and change in financial situation your personality type may shift and will not stay the same over whole life.
What you should take from Part 1 and Part 2 approximate investor type you are and start self analysing some personal biases that my cloud your investment jugment. Also start to think, how you could avoid these errors. Quite a few can be avoided with preparing IPS, which I have reviewed in my previous blog (Link)
What type of investor you are?
There are four generic personality types:
- Cautious Investors
- Methodical Investors
- Spontaneous Investors
- Individualist Investors
Cautious investors are generally averse to potential losses. This aversion may be a consequence of your current financial situation or of various life experiences, but mostly you may exhibit a strong need for financial security. Being a Cautious investor usually results in a desire for low-volatility investments with little potential for loss of principal. Although you generally do not like making your own decisions, you are not easily persuaded by others and often choose not to seek professional advice. You dislike losing even small amounts of money and seldom rush into investments. As a result, you may often miss opportunities because of over analysis or fear of taking action. Your investment portfolios generally exhibit low turnover and low volatility.
Methodical Investors: Continue reading →
My name is Paul. I am a consultant in banking. Few years, ago I have started earning more money than I really needed in life. So I thought, it was time for me to make my money work for me!
Therefore, I have started to educate myself and picked up to study Charted Financial Analyst qualification. Some would say that this is the most challenging portfolio management qualification consisting of 3 level exams, which are testing everything from Ethics to Derivative. At first, there were some downturns in my investment portfolio and still remember my first stock I bought in London Stock Exchange… It was quite thrilling, and scary. I have learned a lot since then about my emotions, decision making, wider portfolio. in this blog, I will my experience and education to help you to make wiser decisions than me. At least initially :). Thus, improve your financial situation and future.
In this blog, I will be providing information sources, training materials, ideas, etc. to simplify investment decision making. Investment is definitely easier than you think. Of course, there will be some work required initially to setup everything. Trust me if you play safe, it is straightforward!!!
We will determine differences between company sizes, risk… Learn about VALUE and GROWTH stocks and everything in between.
This is not a blog, how to trade and make millions in two days, but a blog, where you can start educate yourself and become a smarter investor, save for your pension or eventually buy that dream car/house. All will be done based on logic and emotionless but constructive way! In investment objectivity is everything.
With time… I will discuss subjects:
- 101 Investment in UK with real website and resources, which will cover all investment information needs you may have and more.
- Behavioural Finance, will discuss some most important behavioural issues in investment. Trust me if you are going to make it, this is one of the most important subjects. On paper, everyone can make money/save for pensions, but just with the right mindset, you can do this in the real world.
- I will look into traditional investment theories and ratios and provide further reading material.
- Discuss Risk and Return as well as your life constraints, which will help you better understand yourself and investment capabilities.
- Will discuss various portfolios, you can construct with minimal cost to ensure you have right diversification.
- Will teach Alternative investment and how your house or small company plays in your portfolio.
- Share some content that I enjoy reading and watching about investment
Shall we start our adventure on becoming an independent investor and start saving for your future!!! Let’s becoming demystified with all fancy words the financial world is using. Everything is much simpler when you go step by step… Let me guide you.