Whether you see yourself as a gambler or investor, or a little of both, it’s essential not to fall in love with your choices.
So, what do we mean by this? Well, it’s a strange form of confirmation bias that affects people who trade, gamble or invest for a living. This is when you’ve selected a trade you think is the best you’ve found yet – then you continually seek out information which backs up your own analysis. It’s said that love is blind and you become “blind” to all counter views.
This is very dangerous territory to find yourself in – particularly if you’re placing all your eggs in one exciting basket. It’s also more dangerous if you’ve done this on a previous occasion and have been successful. Success may be your biggest enemy in making future trades, since the tendency is to become unjustifiably over-confident. It’s often said that the bookmaker or casino loves a first-time winner, because they’ll keep coming back forever trying to replicate the excitement of that first big win. So, keep your feet on the ground and be objective at all times. There’s only one Warren Buffett despite millions of people trying to emulate him.
Millions of investors try to emulate legendary investor Warren Buffett’s investing style – as opposed to his singing abilities!
If you have a number of exciting investments or trades like this in your portfolio, then this is a wiser course of action. You’ve probably been around the block a few times and know that they don’t all come good. But if you just have the one big trade in play – be careful as you may be in love. True, you may also have the mother of all investments on your hands, but it’s much more likely that you haven’t. Your judgment is being affected by “love” and you aren’t being objective.
The problem may also be one of doing too much research and analysis. This may seem counter intuitive, and it kind of is. But if you’re suffering from confirmation bias, then all the analysis you do confirms your prior held beliefs. This is particularly true of exciting technology companies, miners and oil explorers etc. So, don’t go further down this road. Instead, seek out the views of people on the other side of the trade – and remember that there is always another side to the trade and therefore, a counter view.
You owe it to yourself to try and take this view seriously and to understand where these people are coming from. You can’t and won’t win them all; the trick is simply in winning more than you lose.
Overall, recognize the telltale danger signals in yourself. If you’re continually checking the price of an investment, dreaming of how much you’re going to make while you do other things, and always scanning news-feeds and discussion forums for every bit of information you can glean, then be careful; you may be guilty of having fallen in love.
Featured image via Flickr.