We Have Met The Enemy…

One of the hardest parts of investing is being able to stand in the middle of a wide and fast-flowing river of information, and remain focused and disciplined on what to pick up and what to let wash past you.

There is just so much of it, all screaming for our attention, and asking us the same question over and over: "What do I think now?"

And then there's our own human frailty: the biases, usually subconscious, that threaten to make that decision even harder.

There are too many to list, but our tendency to want to find confirming evidence and avoid or downplay disconfirming evidence is one of the most common. We also, like the apocryphal bloke who 'read Playboy for the articles', want to believe that we're rational, logical and only interested in the facts, when too often the most read articles on the business websites are the salacious and the soap opera.

Those aren't the only emotions, either.

It's incredibly easy to fall in love with a stock (note: 'stock', not 'company') when the price is going up. It's easy to fall in love with a company, when you like its products, its CEO is charismatic, or its past business performance has been impressive.

And (almost) no one 'hates' quite as well as an investor whose company's value has fallen (and they're pretty ruthless in trying to find people or things to blame, too!).

The thing is, most of these phenomena aren't caused by the news, or the results, or the share price movements.

Oh sure, they're impacted by them. They're often amplified by them.

But the cause is usually closer to home. It's 'us'.

It's our emotions. Our preconceptions. Our hopes. Our expectations.

And it's deeply and unquestionably human.

Psychologists have names for them; usually '[insert name here] bias'.

And they're right.

We see what we look for (confirmation bias).

We overemphasise the recent past (recency bias).

We put too much weight on what we can see, versus what we can't (availability bias).

And we value what we own more highly than something we don't (endowment effect).

And by 'we', yes I'm including myself.

Because (perhaps contrary to belief), I'm just as human as anyone else.

And that's important, because you don't need to be an automaton to invest well.

You can't eliminate your emotions.

What you do need to be able to do is recognise and manage those emotions.

The starting point? Humility.

If you're thinking 'That might happen to someone else, but not me', can I gently suggest a little time in front of a mirror? (Or, if you're game, ask your significant other!)

Without humility, you can't accept your weaknesses and failings and they will almost certainly trip you up.

With it, you can accept that you're not perfect, then work on recognising your imperfections, with the aim of either minimising and/or avoiding them.

No, you won't do it perfectly. And that's okay. No investor is perfect.

But the more you can do to reduce their impact, the less damage they're likely to inflict on your portfolio.

Love a company? Just remind yourself it can't love you back.

Annoyed because the shares are down? Understandable, but remember it's the future, from here, that counts… not the past.

Worried that you might be overvaluing what you own, thanks to the endowment effect? Ask yourself 'If my broker accidentally sold all of my shares tonight, would I buy them back in the same proportions tomorrow?'.

Getting some FOMO over the Anthropic IPO? Buy the shares if you truly think the company will be worth more in 5 or 10 years, but don't just buy them in case there's a share price jump on Day 1.

Can't help but listen to every headline, read every story, and keep reworking your investment thesis? Ask yourself: "Will this change the company's value, or outlook, five years from now?"

It's never fun spending time considering your own weaknesses and failings. It's far more appealing to tell yourself you're smart, funny and good-looking.

But, well, the mirror doesn't lie (trust me, I know!). Hold that mirror up to your investing reflection and really look at the imperfections.

Not to berate yourself, but to ask 'How can I stop this hurting my portfolio?'.

The more honest you are, the more likely you are to avoid those pitfalls.

Fool on!

The post We have met the enemy… appeared first on The Motley Fool Australia.

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Motley Fool contributor Scott Phillips has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.