We are but human!!! This applies to investment too.

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.

________________________________________________________________________________________

Part 1

Bounded Rationality

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 →

Discover Inner Investor

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)

____________________________________________________________________________________________

Part 1

What type of investor you are?

There are four generic personality types:

  • Cautious Investors
  • Methodical Investors
  • Spontaneous Investors
  • Individualist Investors

Cautious 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 →