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Investing and Confirmation Bias
Consider, if you will, some of these phrases: “Buy low, sell high.” “The trend is your friend.” “Buy straw hats in winter.” “The bulls make money. The bears make money. The hogs go to slaughter.” You might have heard all or one of these sayings. It is equally likely that you might have heard other similar phrases that are not listed here.
It is easy to reduce investing to a few memorable, pithy maxims. It is easy, yet it does not mean that those maxims capture true market wisdom. For example, think about “Buy low, sell high.” That is a great statement if you can adhere to it. Just one thing, how do you know when you are buying low and selling high? Isn’t that something you only really know in hindsight? Isn’t that something you only know after the test of time?
One of the challenges of investing is that it is too easy for it to become an ego driven endeavor. How might that work? Well, reflect on this. Many of us are competitive by nature. And, many of us like to share news of our triumphs with those around us. If we get a raise at work, or have a particularly good year in our business, we may be prone to tell our friends and family. We tend to be proud of our accomplishments.
Translate that to investing. Imagine that you began investing in the stock market and everything you invested in appeared to being going up in value. You might think you have a particular talent for investing, and who knows, maybe you do. And so you were proud of your investing accomplishments and told your friends and family.
Your success at investing became a point of pride. However, please remember this saying, one that does not just apply to the stock market, “Pride cometh before the fall.”
In my estimation, many people develop an outlook toward the stock market, or investing in general, based on feedback from particular experiences or from a combination of beliefs and experiences that tend to confirm those beliefs. This is probably true of a host of outlooks we have relating to a variety of areas.
This leads us to the notion of confirmation bias. According to an online entry in the Encyclopedia Britannica, confirmation bias is “the tendency to process information by looking for, or interpreting, information that is consistent with one’s existing beliefs.” (https://global.britannica.com/topic/confirmation-bias)
Simply put, you favor a certain idea and so you cherry pick data that tends to support that idea. I suspect we have all been there, wittingly or unwittingly.
When it comes to investing, and many other endeavors, it is wise for us to work at keeping confirmation bias at bay. Certainly, this can be a tall order. There is something comfortable about thinking we know something, even when our knowledge is quite incomplete.
I will offer one piece of information here that I believe is irrefutable. This is a piece of information that I believe is immune to confirmation bias. It is also a piece of information that flies in the face of our consumer driven, got to have it now society. Here it is, “The less money you waste on things you do not need, the more money you may have to save and invest.”
If you have more money to invest and you invest in a diversified way, you might be better off than a person who wastes a lot of their money and/or puts all their eggs in one basket. Now, this is not to say that diversification is some kind of panacea. When things go bad even a diversified portfolio may significantly decline. Yet, isn’t it better to start with more and put it into different vehicles than blow a bunch of money buying things you have no use for and then investing what you do have into one thing? I think so.
You might want to discuss these issues with a financial services professional or you might want to reflect on them yourself. Whatever you do, remember that thinking alone does not get things done. To make things happen, you must take action.
Scott McGimpsey January 12th, 2017
This material was prepared by Scott McGimpsey and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources, however, we make no representation as to its completeness or accuracy. Neither Summit Brokerage Services Inc. nor Scott McGimpsey is engaged in rendering legal, accounting, or other professionally services. If such assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any federal, state, or municipal tax penalty. Moreover, a diversified portfolio does not assure a profit or assure protection against loss in a declining market. UNIFIED PLANNING GROUP is an independent firm with securities offered through Summit Brokerage Services Inc., Member FINRA, SIPC