Knowing everything about valuing companies will mean nothing if you lack the skill to apply that knowledge in a rational manner when you are faced with challenges that may throw off your concentration. You need to realize that in value investing other investors will not always act in a rational manner. To take advantage of the opportunities, we have to react rationally. It's a lot more difficult than it sounds.
We're brought back to the age-old debate of nature vs. nurture. When you look at it from a different perspective you can plainly see that some things have evolved in human nature and other things result from how we perceive the world. The problem about using our evolutionary instincts when dealing with the stock market is that the stock market has not been a survival factor throughout evolution and we have no instincts about how to deal with it. The result is trying to incorporate other instincts that we deem appropriate to the new situation when in fact they are not.
There are two basic factors at work here; fear and greed. As a caveman this was quite helpful when determining whether the dangers of hunting mammoth outweighed the need for a delicious mammoth steak. But, fear and greed will not help someone assess the sustainability of cash flow. The herding instinct was great when trying to keep the wild animals at bay, but you do not want to blindly follow the herd in the stock market.
They say that about 70% of people think that their driving skills are better than average and that is probably also true of people who invest thinking that their strategies are the best. Overconfidence leads to rash decision-making. And another trap to avoid is the framing of your perceptions in the light of your own limited experience; just because you had a bad experience with a company as a consumer, it doesn't mean that their stock is rubbish.
These are just some of the pitfalls you can run into when investing, if you want some more information and some tips take a look at what an expert has to say in this information video about investing.
We're brought back to the age-old debate of nature vs. nurture. When you look at it from a different perspective you can plainly see that some things have evolved in human nature and other things result from how we perceive the world. The problem about using our evolutionary instincts when dealing with the stock market is that the stock market has not been a survival factor throughout evolution and we have no instincts about how to deal with it. The result is trying to incorporate other instincts that we deem appropriate to the new situation when in fact they are not.
There are two basic factors at work here; fear and greed. As a caveman this was quite helpful when determining whether the dangers of hunting mammoth outweighed the need for a delicious mammoth steak. But, fear and greed will not help someone assess the sustainability of cash flow. The herding instinct was great when trying to keep the wild animals at bay, but you do not want to blindly follow the herd in the stock market.
They say that about 70% of people think that their driving skills are better than average and that is probably also true of people who invest thinking that their strategies are the best. Overconfidence leads to rash decision-making. And another trap to avoid is the framing of your perceptions in the light of your own limited experience; just because you had a bad experience with a company as a consumer, it doesn't mean that their stock is rubbish.
These are just some of the pitfalls you can run into when investing, if you want some more information and some tips take a look at what an expert has to say in this information video about investing.
No comments:
Post a Comment