The market is down big this year. It’s no fun. When we’re in the middle of it, it feels like there’s no end. And then…we do something! Anything!! Selling something is usually involved. And we just can’t help ourselves, no matter what logic or the evidence may tell us.
Because we’re programmed to do it.
Thanks to evolution, we are bad investors – whether the market is down or up. Maybe even more so when it’s up! (Bitcoin at $68,000 anyone?) Sure, our instincts to avoid danger, to find safety in numbers, have served us well as a species in the survival game. But this programming works against us when it comes to investing. It’s not surprising. Stock markets are a mere 500 years old, a blip compared to our own history, and not nearly enough time to influence the circuitry of our brains. It makes sense to run from a pack of wolves. But to run from a down market? Bad idea. Follow the masses to a bountiful source of food? Sure. But to follow the crowd into crypto, for fear of missing out? Also bad.
We thought we’d explain some of these “anti-investing” behaviors with a meaning and how it may affect us. A couple of “Ah-ha!” moments are sure to follow.
Recency Bias: Giving recent information greater weight than the long-term evidence and data warrant
What we think: “What?! Up 56% last year? 88% over the last three? I’m moving it all into this fund!”
Herd Mentality: The tendency for individuals to mimic the actions of a larger group
What we think: “Ahhh! This market is killing me! It’s down, so everyone else must be selling. What do they all know that I don’t? Gotta be something. That’s it…I’m out too.”
Gambler’s Fallacy: Believing that the probability of a random event occurring in the future is influenced by previous instances of that type of event, like a dice roll
What we think: “This stock – it’s gone down six straight days. I gotta buy it. I mean, it can’t go down again, right?”
Loss Aversion: Focusing on avoiding losses more so than on making gains, as the pain of a loss is stronger than the pleasure of an equivalent gain
What we think: Year 1: “Hmm, I was up 20% last year. Alright, not bad at all.” Year 2: ”Down 20%!? @$%#! Ok, just don’t panic. Ah! I’M PANICKING!!”
Confirmation Bias: Favoring evidence that supports our beliefs and glossing over that which refutes them
What we think: “I mean, I know this company. I’ve worked here for 20 years. This stock is going up. Whoever wrote this article is an idiot.”
Anchoring: The tendency to become attached to a single piece of information that may not be accurate or relevant in trying to draw an appropriate conclusion, like a previous stock price
What we think: “No way – I’m not selling. So what they closed half their stores. It was just at $92 a month ago, and I’m not selling until it gets back there.”
Overconfidence Bias: Assuming past successes were the result of skill and are repeatable, and failures were the result of bad luck
What we think: “Wow. I turned $3k into $20k with that penny stock in a month! The next one’s gonna get me to $100k. I know it.”
Disposition Effect: The tendency to hold onto bad investments to avoid realizing losses
What we think: “Maybe I shouldn’t have bought Bitcoin at $68,000. Whatever – it’s coming back. It has to come back!”
While these times are tough, the market returns are quite normal. We’ve been here before. The true risk is time. Don’t give it enough time and we fail. But if we do give it the time it needs, the market will be just fine. (See this blog for the evidence: https://greatoakcp.com/can-you-wait/)
John, Bill, Mark & Melanie