Note from Senior Managing Editor Christina Grieves: In today’s article, Alexander Green discusses cognitive biases. We all have them, but often we don’t realize how much they affect our day-to-day decisions and actions… even our investing.
That’s why it’s important to recognize your biases and actively work to balance them out. And one bias that comes to mind immediately is the negative preconception many investors have about penny stocks. But not all “penny stocks” are created equal!
That’s where Alex comes in… You see, he recognizes the powerful potential of microcap stocks – exceptional companies with very small market caps, trading at low prices that give them tons of room to grow. In fact, Alex has identified a Microcap Match for a household-name blue chip stock that ticks every box on his Dream Microcap Checklist. So if you’re ready to combat your microcap bias, click here to watch Alex’s latest research presentation and learn more.
We all like to think of ourselves as rational and objective. And in most ways, we are.
We don’t leave for a long drive without checking the gas tank or expect the lights to stay on if the power bills aren’t paid.
Yet none of us is entirely objective all the time. Our actions and opinions are colored by various biases.
These can hurt us in the investment arena, making our financial goals more difficult to reach.
Want to increase your returns? Check these three common biases at the door…
Investors have a strong propensity to believe that what has happened lately in the markets will continue to happen.
This can be beneficial for short-term trend followers. (Hence the old saying, “The trend is your friend.”)
But it’s a mistake to believe that just because markets are rising, they will continue to climb. Or that they will keep falling if they’re in a downward trend.
Investors tend to be too complacent at market tops and too scared near market bottoms.
It’s important to realize that the market can and often will change direction suddenly and without warning.
Think back to the first quarter of last year. Stocks quickly lost a third of their value.
And then, almost as abruptly, began a rally that has lasted a year and half and caused the market to double.
Smart investors follow a contrarian approach. They lessen their exposure to equities as the market hits new highs and increase their exposure as it hits new lows.
It’s called tactical allocation. And it works.
By the time we reach adulthood, most of us hold fairly strong political opinions. These can’t help but shape our expectations about the future.
But it’s a mistake to let your political beliefs drive your investment portfolio.
I told my conservative friends not to bail on stocks when Barack Obama and Joe Biden were elected.
And I told my progressive friends not to bail on the market when Donald Trump won the White House.
Yet many folks find this difficult.
For example, New York Times columnist Paul Krugman predicted financial calamity if Donald Trump were elected in 2016, even posting this on election night:
It really does now look like President Donald J. Trump, and markets are plunging. When might we expect them to recover?… A first-pass answer is never… We are very probably looking at a global recession, with no end in sight.
That sounds more like some guy yammering at the end of the bar than a Nobel Prize-winning economist.
Don’t get me wrong. Trade policies, regulations, taxes, government spending and new legislation all affect economic growth, consumer confidence, business investment, corporate profits and, ultimately, share prices.
But commerce trumps politics.
Historically, markets have done well under both Democratic and Republican administrations. You should stay invested during both.
This is the most powerful bias of all. And the most harmful to investors.
Every second of every day we take in far more data than our brains can possibly process.
Because nothing is more important than our survival, our amygdala – the brain’s early-warning system – gives priority to the things that might harm us.
Studies show we pay 10 times more attention to negative news than to positive news.
And the corporate media knows it.
Newspapers, cable news shows, websites and blogs have a 17-to-1 ratio of negative stories to positive ones.
These stories are far more likely to be viewed and shared with others. And a larger viewership means more advertising dollars and bigger profits.
As a result, the media does a bang-up job of keeping people anxious, angry and afraid.
How does this help you assess risk and opportunity in the market? It doesn’t.
It’s harmful, in fact.
Yet human ingenuity, technological innovation and capital markets create enormous progress over time, lengthening our lives and improving our standard of living.
Things are getting better for most people in most places in most ways.
This doesn’t mean, of course, that things are getting better for everyone everywhere in every way.
That wouldn’t be progress. That would be a miracle.
Things are not getting better, for instance, for most men and women in Venezuela, Haiti and Afghanistan.
But generally speaking, people around the world are living longer, safer, richer, freer lives than ever before.
So follow the trendlines, not the headlines.
If you recognize the many positives and keep your biases in check, your investment portfolio – not to mention your disposition – is bound to benefit.