Behavoural Investing

May 22, 2018 | Doug Mushka


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Behavioural investing is about making incorrect investment decisions based on feelings instead of facts.  Behavioural biases are often deeply ingrained so that the same mistakes are made over and over again.

 

Some clients hold a variety of stocks over the long-term because they used to work at various companies, got a tip from a friend or family member, etc.  Some want to hang on to all of the losing positions and will not sell them until they recover.  Anchoring occurs when clients allow certain pieces of information to control their investment decisions.  Hanging on to a position just because you do not want the feeling of realizing a loss is irrational.

 

For some that worked at a company for a long time, they may hold significant positions in that company's common shares.  This is quite common in Western Canada with energy positions.    Some hold on to positions because they are familiar or local.  These are not safer.    Broadly based global portfolios like the ones used by pension plans are a wiser way to deploy capital.

 

Some clients believe that what has happened in the recent past will continue to happen.  Recent trends or events should not be given too much weight in investment decision making.  Long-term trends and fundamentals are much more important.    We must not be swayed by recent news events (Trump, Brexit, North Korea, Trans Mountain debate).  

 

Sometimes concentration in particular positions does work, at least in the short-term.  Is that due to superior stock-picking skill or just luck?  Hindsight bias leads someone to believe after the fact that the onset of an event was predictable and completely obvious.  Those movements cannot normally be predicted.  

 

No one has perfect foresight.  That is why diversification, discipline and controlling our emotions are the most important factors in being successful at investing.