5 Ways Your Mind Plays Tricks on Your Trades
Between fear of missing out and holding on to losing investments too long, your own brain can lose you tens of thousands in stocks. In this video, I’ll reveal the five ways bad investor behaviors cost you money, how to spot them and how to make sure you don’t make the same mistake twice!
Why Investors Lose Money in Stocks
Nation, whether you’re just starting to invest or you’ve been investing for years YOU NEED TO START HERE! What I’m about to show you is something nobody talks about but is the number-one reason investors lose money in stocks, the biggest obstacle to making money…
You are your own worst enemy when it comes to stock investing!
In this video, I’ll reveal the biggest behavior mistakes in investing. All the biases, the fears and just plain mind tricks you’ll need to overcome if you want to make money. I’ll explain each behavior, how to know when your brain is playing tricks on you and how to avoid it!
It’s part of a special investing education series I’m starting, showing you what it really means to analyze stocks and invest your money. I’ll be using content straight out of the curriculum for the Chartered Financial Analyst designation, the gold standard for stock analysts working on Wall Street. The designation involves three years of exams and thousands of pages of curriculum but I’ll be laying it all out for you in these videos.
I’m going to be putting this one and all those videos into a playlist called How to Invest in Stocks on the channel. Make sure you tap that subscribe button so you don’t miss any of these because I’ve got some great in-depth videos coming from options trading strategies to technical analysis and just how to be a better investor!
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How to Prevent Investing Mistakes
Nation, to understand why beating these investor mind mistakes is so important, you first have to understand that most investing advice out there is wrong! Most advice hinges on the idea that investors act logically, they analyze stocks and the market and then make decisions based on facts…
Yeah, investors are as rational as a submarine with screen doors.
From Tulip mania to the dot com bubble, investors follow the crowd and they follow their gut. So behavioral finance builds in those biases and the weird tricks our brains play on us while investing to beat those subconscious tendencies.
How to Be a Better Investor
Now how can YOU use this video to be a better investor? I’m going to reveal five ways your brain plays tricks on you and makes you lose money. These are investing mistakes that nearly every investor makes, whether you’re a beginner or a pro…and I’m not going to lie, beating them takes work. This is some deep psychological shit right here!
Beating these mistakes means first understanding what they are and realizing when you’ve made them in the past. It’s a kind of investor confessional to clear your soul.
Then, before you make an investing decision, revisit the list to make sure you’re not making the same mistake again.
And as a commitment to yourself, I want you to watch through the list and then leave a comment below about one time you’ve made one of these mistakes…it’s only this kind of self-knowledge that is going to help you understand and beat these mistakes so think through these and leave a comment below.
5 Bad Behaviors That Make Investors Lose Money
Our first stock investor behavior is called loss aversion bias and I started with the worst here because this one alone will destroy your portfolio!
And now, all of these investor mistakes are going to have fancy psychological terms but I’ll give you examples of each and I guarantee, you’re going to get that aha moment and realize you’ve been making a lot of these without knowing it!
Loss aversion just says that, emotionally, losses are so much more powerful than gains. A 20% return is nice but a 20% loss will make even the tough guys cry.
Our brains just don’t react the same to gains as to losses. We end up taking more risk to avoid those losses, and take less risk to increase our returns…which is actually just the opposite of what we should be doing.
For example, investors will sell their winners quickly, being content with locking in a fifteen- or 20% return…but they’ll hold on to their losing stocks and even buy more. They avoid that pain, the reality of the loss by deluding themselves that the stock HAS TO rebound.
In fact, what should be happening is you reduce your risk in the bad investments by cutting your losses fast and then increasing your risk in the good stocks by buying more!
But our brains just don’t want to let us do that! We go from investors to gamblers and wake up every morning just hoping to GET BACK TO EVEN in that investment.
Losses suck folks and I’ve been pulled further and further into a bad investment myself. Avoiding it means a formal approach to investing. That means writing down your rules for stock investing, when do you invest more and when do you cut your losses? You need a checklist for analyzing a stock and what you’re going to do if a loser doesn’t meet up to the criteria…because if you just wing it on a case-by-case basis, you’re going to end up holding those bad stocks too long!
Next here, overconfidence, is one that actually gets worse the more you learn about investing.
This is the irrational belief in your own skill or ability to pick investments. That supreme confidence that you’re going to be right.
Nation, if you ask 100 investors if they are below, average or above average investors…you’ll get 99 above average investors and one seriously disturbed individual.
And c’mon. It’s natural to think you can make better investing decisions. You spend time researching and learning…and statistically, 50 of those investors ARE better than average …they’re the 50 investors watching this video!
But when you get overconfident about your ability, you tend to do less research. It’s ironic because the learning and research that you’ve done in the past to create those returns…that’s what can make you overconfident and make you do less of what made you successful. You rely more on your gut and less on the analysis that actually did make you a better investor.
Another part of this overconfidence behavior is you attribute your wins to your ability, it was your awesome investing skills that found the right stock…but then your losses are dismissed to some unavoidable event that wasn’t your fault.
And what we see in overconfident investors, they underestimate their risks. They chase high-risk investments because they think that super-human skill will tell them when to cash out and exactly how to play it. They trade in and out of stocks…and just lose money!
Beating overconfidence bias is about being honest with yourself. Look at your investments over the last year or two, how did your total return compare with the market? If you missed the market return…then it’s time to eat a little humble pie…it tastes like shit but we all have to do it occasionally!
After looking at your whole portfolio, take an honest look at each investment as well. Did you get lucky in a few big wins and that saved your portfolio? Just because you beat the market doesn’t necessarily mean great investing skill if most of your stocks underperformed.
And here, if you did underperform the market…you’ve got to be honest with yourself. Continuing to think yourself the next Warren Buffett isn’t impressing anyone and it’s just costing you money. Instead, maybe it’s time to take a little more of the weight off your picks and put more into a group of stock funds that will get you that market return?
We’ve still got three more stock investing behaviors to reveal but First, I want to personally invite you to get The Daily Bow-Tie, my daily market update that will give you all the trends, strategies and important news you need to invest your money. It’s completely free, just something I like to be able to do for you out there in the community and it’s completely new this year.
The saying goes that hindsight is 20/20…I say hindsight is a BITCH!
Hindsight makes you think you could have, or should have predicted that 1,000% investment, it makes you sit there fantasizing about getting rich and gives you the FOMO that makes you jump into the next get-rich scheme you see…and loses your money!
And hindsight is really based on the fact that we remember the events that happened with crystal-clarity but not the situation or what didn’t happen. We remember the huge gains in Bitcoin and then all the articles and friends that told us to invest…and we feel that crushing regret at not jumping in.
But you see, we never think about all the recommended investments we didn’t buy that ended up being a giant turd. The Bitcoin bulls like to point out when they recommended it last year…but fail to point out their historic misses like the prediction coins would rebound to $25,000 by the end of 2018…instead of falling further to $3,500.
So we remember these huge missed opportunities and when the next high-risk, get-rich investment comes along…we just can’t resist!
Nation, honestly, with the rise of social media, it feels like the stock market has just become one big pyramid scheme. People don’t analyze stocks anymore. They just run to social media, ask for a quick stock idea and then buy in. So when you get a million people talking about the same investment, it’s not about value anymore but how many people you can get to follow you in.
Beating hindsight bias and this fear of missing out is about really thinking about those past investment scenarios. When you feel that regret of missing out on the 1,600% rise in GameStop…remember also that the shares lost 91% of their value over the five years to July as revenue plunged 30% in two years and debt was 250% more than the market value.
Realize all the risks that investors at the time were confronting and don’t think any investment was “the obvious choice”
You also have to be careful when comparing a current investment opportunity with one from the past. People love to ‘prove’ something will happen in a stock because the market did this or that in the past…and it’s all bullshit. Just because the price of a stock went higher after breaking through some level or just because the market was up in January…all these little anecdotes mean nothing for the future return of a stock.
This next one goes way beyond stock investing, confirmation bias.
This is the tendency to look for the information that confirms or proves your belief and also ignoring or undervaluing any info that contradicts the belief.
And this one has been going on well before social media but OOOH brother, how it’s gotten over the last few years. Through your past interactions, social platforms like Facebook changes what you see to only show you posts that align with your beliefs…you get pushed into this cocoon of information that amplifies your opinion and hides anything that challenges it.
But, I’m not here to change the world. I’m here to help you be a better investor so let’s tackle one problem at a time. Confirmation bias means you only read articles or analysis about a stock or the market that validates what you already think.
Think the market will go up, then you’re less likely to even click through an article about a bubble in stocks or the risks. You’re only reading articles with a positive headline and avoiding dissenting opinions.
Even if you read something contradictory, you undervalue it with some kind of reasoning to avoid building the facts into that pre-existing narrative
And of course, when you only seek that confirming evidence, you just get more set in your opinion…hell, everything you read is telling you that you’re right! And you miss the real evidence you should be paying attention to.
The best way to beat confirmation bias is to consciously build into your decisions time to play devil’s advocate, genuinely look for the other argument and just list out the pros and cons next to each other.
Anchoring bias is another one with a fancy term but actually a simple definition.
This is where you create an initial opinion on something, a stock value or an estimate for earnings, and then hold strong to that…only changing it very gradually even against overwhelming evidence.
And if you’ve ever wondered when to sell a stock or how to tell when you’re wrong about an investment, this is the biggest stock investing behavior you need to beat.
Anchoring causes you to decide that a stock is worth a certain amount or that earnings will come out above expectations…and even when new information comes along to call that into question, you don’t adjust your opinion enough to avoid losing money.
Basically, any new information you get is warped through the lens of that initial opinion. And this goes beyond just ignoring the information like we saw in confirmation bias. Here you might actually read it and be open to the differing opinion but you don’t move your prior estimate much even if you should.
Here you’ve got to understand that the market, prices and stock values are constantly shifting and that past information is actually less relevant than new info. If nothing else, that new information should count for more of your analysis, not less.
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If you’re ever going to invest in stocks and not lose your money, you need to master these five cognitive biases and bad investor behaviors. Best of luck!
About the Author
Joseph Hogue is a financial expert and investment analyst. After serving in the Marine Corps, he started his career investing in real estate before becoming an investment analyst for some of the largest private investors. He's appeared on Bloomberg and on CNBC as an investment expert and has published ten books in personal finance. Now he helps investors reach their financial goals and invest in the stock market with some of the same advice he used when working for the rich.