When It Comes to Investment, You’re Only Human

In yesterday’s essay I finished off with a discussion about common investing mistakes. We all make them. After all, we’re only human.

While that is a standard saying to excuse behaviour that, on reflection, we might have modified, it’s particularly apt when it comes to the stock market.

In short, the human brain is terribly suited to ‘playing’ the stock market. We’re just not wired for it.

That’s why we seem to make the same mistakes over and over again, especially when we start out. And it’s why we need to examine the errors we make, so we can modify our behaviour.

The first step is to admit that we make errors. Surprisingly, some people can’t bring themselves to admit this. They always prefer to blame someone else. The winners, of course, are all their own doing. But the losers are always the result of someone else’s interference.

One of my core investment rules (which I employ in my Crisis & Opportunity newsletter) is that there are no excuses. Ever. When you take absolute responsibility for your decisions, it sharpens the mind. There is no fall-back position to comfort yourself.

Another one of my main rules is to understand that it doesn’t really matter what I think. My opinion is just one amongst millions, and therefore insignificant. For various reasons, we believe our own opinions have more merit than others. But they don’t. They’re just there, jostling for position with everyone else’s.

That doesn’t mean you shouldn’t form a view on something. But don’t cling to it and own it like your portfolio depended on it. Be willing to admit you’re wrong, and move on to your next idea.

Every investment you make is just the testing of an idea or opinion. They’re not all going to be right. So don’t invest so much emotional energy into believing that you’re right.

I’m sure all this makes intuitive sense to you. But it’s another thing entirely to implement a process that stops you from ‘only being human’. 

My solution to this is a simple one. It’s a process that provides checks and balances to my investment opinions. Maybe it could be a solution for you, too?

In short, I let the market tell me when I’m on the right track, or when I’ve strayed from it.

If you think about it, there is no way to make money if the market disagrees with your view. I know ‘contrarian thinking’ is a popular money making strategy, but if your contrarian idea remains contrarian, you won’t make a cent from it.

You need the market to come around to your view at some point. This increased demand for shares pushes up the price and gives you a profit. You absolutely need the crowd on your side.

Let me give you a recent example of a stock in the Crisis & Opportunity portfolio. I had been keeping my eye on regional TV broadcaster Prime Media [ASX:PRT] for some time.  It was cheap, and I knew changes to media ownership rules would occur at some point.

But the share price was going down. I didn’t just assume my idea was right and place my bet. I wanted to make sure the market was on board with the idea, too. If it wasn’t, I knew there wasn’t much chance of my subscribers making money.

So here’s what I did. I waited for the share price to stop going down and start making some upward movement. Have a look at the chart below. Note that I didn’t try to pick the bottom. That’s a low probability play. I waited until I saw evidence that the market was on board with my view.

At the time, debate about changes to media ownership rules was on the rise. Change was in the air, and the market knew it. So I jumped on board.

As you can see in the chart below, subscribers got in around 36 cents. The price then ran up to a high of 50 cents last week, when the government announced changes to the media ownership laws. That now puts PRT in play as a takeover target.

But you can also see that the price has sold off since the announcement. This nearly always happens. That is, the market rallies in anticipation of news, and then sells off when the news comes out.

Prime Media Group Limited 20-09-17
Source: Optuma
[Click to open new window]

If you have a process, you will be able to act on ideas proactively, not simply react to the news. Because when you read about something, you can bet that it’s already in the price. The market has already factored it in.

An investment process helps you target these opportunities. It also stops you from being all too human when making investment decisions.


Greg Canavan,
Editor, Crisis & Opportunity

Greg Canavan is a Feature Editor at Money Morning and Head of Research at Fat Tail Investment Research.

He likes to promote a seemingly weird investment philosophy based on the old adage that ‘ignorance is bliss’.

That is, investing in the Information Age means you have all the information you need at your fingertips. But how useful is this information? Much of it is noise and serves to confuse, rather than inform, investors.

And, through the process of confirmation bias, you tend to read what you already agree with. As a result, you often only think you know that you know what is going on. But, the fact is, you really don’t know. No one does. The world is far too complex to understand.

When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases.

Greg puts this philosophy into action as the Editor of Greg Canavan’s Investment Advisory.

Read correctly, a chart contains all the information you need. It contains no opinions or emotion. Combine that with traditional stock analysis and you have a robust stock-selection strategy.

With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the basic, costly mistakes that most private investors do every time they buy a stock.

To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Money Morning here.

Official websites and financial e-letters Greg writes for:

Money Morning Australia