Biases by Getting Burned in the Market

In today’s day and age, it is all too common to not look at things through an objective lens. Whether there is something in the news, a personal experience, or a statement that a friend makes, sometimes this information comes to us and we look at it as if it is a statement of fact.

Do not be fooled…

Around six months ago I was speaking to a friend about his experiences investing in the stock market. Immediately, his guard went up and he started making comments such as “the markets are too risky” or “most people can lose money in the stock market”. He made these comments with conviction and I could tell by the look in his eyes that changing his viewpoint of this would be next to impossible even if returns fell directly in his lap.

​I went on to question his convictions and it was very interesting to hear his viewpoint. Before the 2008 financial crisis hit, my friend invested heavily in the stock market. He invested near the top and didn’t have the experience of dealing with a stock market recession before. Nevertheless, the market crashed and several of his investments went either bankrupt or he sold at a fraction of what he paid for them. He lost most of his money because he did not manage his exposure, risk, and portfolio correctly.

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He experienced the worst the market has to offer, and he lost nearly 55% of the money he put into it. Something damaging that came from this was he missed out on quintupling his net worth over the past decade. While he was playing it safe by being having cash underneath his mattress, inflation was devaluing his net worth and furthermore, he lost out on a life-changing decade bull market. The thing is this is not the most dangerous aspect.

A very dangerous thing in the markets is having a negative mindset based on one’s personal biases.

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This personal bias is equivalent to a disease of the mind. The biased person can’t accept the reality of the situation. Furthermore, it is now, unfortunately, a way of life that will take a long time to overcome due to the traumatic experiences of losing more than half of what one toiled for so dutifully. Personal biases are all around us and it is crucial as investors that we remain completely objective with our focus. Please see the list below in which I often see individual investors make personal biases on. These biases happen all the time, and most people get burned by one of these to some extent during their investing years.

  1. Investing in Companies that you like as a consumer
  2. Hyped up companies by the media
  3. Cool sounding ticker symbols
  4. Trends talked about by celebrities
  5. Tips on a stock from a friend
  6. Cinematic and impressive marketing campaigns
  7. Political campaign hopes
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​Hype and talk can lead to the fear of missing out on the market. The above examples handicap many investors every year and they would have been in good shape if they did just one thing. Performed objective fundamental and technical analysis. But how fun is this? It is not strictly about fun, as a photographer calibrates a shot through a zoom lens, you need to have the same level of clarity of where you are putting your money. Never let a personal bias sway you, there are hundreds of biases that one may have on any given day, but to act on these would be foolish. To identify if it is a personal bias simply triangulate with people who are willing to disagree with others to see if they agree or not. If it is a personal bias, often, everyone will not agree.

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​My friend will be missing out on a lifetime worth of compounding and growing, but I share this with you because I want to show how destructive a personal bias can be from a return’s standpoint. From this example, the personal bias cost him approximately $45,000 over the course of 10 years. This is a significant sum of money, that has been simply wasted. I urge you all to consider, what personal biases do you make on a daily basis in your financial life that are holding you back?

-Published 8/11/2020


Disclaimer:
Nothing stated in this article is a recommendation from Forehand Financial to buy or sell a particular security or asset class. You should wisely consider your tolerance for risk, time horizon, and financial goals before making an investment. With investing, you run the risk of losing money, always read an investment prospectus and make an informed decision before allocating capital to a particular investment.  

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