Common psychological misunderstandings in stock market investment
Why is it said that "people tend to sell money-making stocks prematurely and hold money-losing stocks for a long time."? There is an old adage on Wall Street: The market is driven by two forces, greed and fear. The purpose of investment is to make money, but can investment definitely make money? If you can make money, how much money can you make? Different answers to these two questions actually represent completely different investment motivations; different investment motivations bring different investment behaviors; different investment behaviors correspond to different investment psychology. Today I recommend an article to talk about some common psychological misunderstandings in investment.
Let’s start today’s article with a speech by Buffett: In a speech, Buffett mentioned the misunderstanding of investment and pointed out that some people do not think that the entire market will prosper, they just think that they can choose from the surplus. Out comes the winner. He explains that while innovation may lift the world out of poverty, investors in innovation historically have not ended up happy. The following are his original words:
"This slide only lists half a page of content, and the content comes from a 70-page list that includes all the car companies in the United States." He said in The complete list wavered in the air. "There are 2,000 car companies on it: the car was the most significant invention in the first half of the 20th century. It had a huge impact on people's lives. If you saw how the country developed because of the car in the era when the first cars were born, up, then you might say, “This is something I have to invest in. "However, of the more than 2,000 car companies a few years ago, only three companies survived. And, at one time, all three companies sold for less than their book value, that is, less than the money that was originally invested in the company and retained. Amount. Therefore, although cars have had a huge positive impact on the United States, they have had an opposite impact on investors."
In this era of new models and new concepts, it is called the Internet. At the dawn of web2.0 and web3.0, can Buffett’s speech give us any inspiration?
The first misunderstanding: overconfidence and the illusion of control.
A professional survey shows that 82% of drivers with more than one year of driving experience believe that they are above average. Obviously, most people overestimate their own abilities. An in-depth interview with 2,499 entrepreneurs found that 82% believed that their own business would be successful, while only 39% believed that other people’s businesses would be as successful as theirs. This is the inevitable overconfidence.
It is a rule of almost all casinos to place your bet before the coin is thrown. For example, when playing dice to guess the size, casino owners found that gamblers placed significantly larger bets before rolling the dice than after the dice were rolled. When an investor makes an investment decision, he or she will think that he or she is confident enough about the future and that he or she can control future changes. In fact, you have no control over what happens in the future. Just because you are involved, you think you have control. This is an illusion of control caused by overconfidence.
In actual investment, overconfidence and the illusion of control lead to at least three problems:
The first is frequent trading. Print out our stock delivery slips for 2007 and take a look. We overestimate the accuracy of information and our ability to analyze it, leading to frequent trading. Not only does it increase transaction costs, it also makes it easier for us to make wrong investment decisions.
Inability to fully diversify investments: overconfidence leads to concentrated investments and concentrated risks. Investments are heavily concentrated in equity products such as stocks, and they have completely lost their grasp of the allocation of major asset classes. Including the basic citizens, last year the vast majority of assets were concentrated in one investment type, stock funds. Even without considering how the market conditions will change in the later period, this approach itself is unreasonable from any perspective such as asset portfolio and risk management. of.
Selective filtering: Only willing to accept information that supports one's own judgment, and filter out information that does not support one's own judgment, leading to more trust in one's own judgment. There is competition between longs and shorts in the market every day. There are reasons for both shorts and longs. This is always the case in the capital market. However, people who are determined to be bullish often ignore the reasons for being bearish, even if these reasons are very obvious. Why? Selective filtering of information due to overconfidence and illusion of control.
The second misunderstanding: pride and regret
People will avoid behaviors that lead to regret and pursue behaviors that they think are good. Regret is the emotional pain that occurs when people realize that a previous decision was judged to be bad; pride is the emotional joy that occurs when people realize that a previous decision was judged to be correct.
For example: You have been buying the same set of lottery numbers for several months, and a friend suggests you choose another set of numbers. Will you change? In fact, everyone knows that the probability of winning for both sets of numbers is the same.
There are four possible situations: winning with the original number after changing the number, winning with the new number after changing the number, winning with the original number without changing the number, and winning with the number recommended by a friend without changing the number. Consider which ones will make you regretful and which ones will make you proud. Let’s take a look at your decision again. More people will not choose to change their numbers. The reason behind this is not that the probability of choosing the numbers they choose is high, but that if they change their numbers, the joy of winning is not as great as the joy of winning with the original numbers. Similarly, if you don't change your numbers, the regrets caused by winning the lottery with the numbers recommended by your friends will be far less than the regrets you will bring if you change your numbers and win with the numbers you originally selected.
Let’s look at a more specific assumption: you have two stocks, stocks A and B. Stock A is currently making a profit of 20%, and stock B is currently losing 20%. Who will you sell? The choice of most investors is to sell A and hold B, because selling A brings emotional happiness to themselves, while selling B brings emotional pain to themselves - I want to at least wait until B returns to its cost. price and then sell. This leads to that seemingly ridiculous conclusion that happens many times: people tend to sell money-making stocks prematurely and hold on to money-losing stocks for a long time.
The third misunderstanding: attachment to the past
The so-called attachment to the past means that people tend to use similar investment results in the past as a consideration when evaluating a risk decision, even very important of. Why was fund sales so booming in 2007? It is not that ordinary people have discovered the investment value of funds, nor that they have made risk decisions about this investment, even if they only make risk decisions with the professional knowledge of bank account managers. They only made investment decisions based on reasons such as their neighbor buying a fund and making money, and their child's second uncle buying a fund and making money. We call it the “wealth effect.” And after he made money from his own investment, this wealth effect became even more obvious. In fact, investors with a little investment experience know that the risks and returns of investment are not directly related to the past performance of the investment. Even high returns in the past generally represent an overdraft of future returns, leading to the maintenance of high returns. is very difficult.
A very famous psychology experiment. The first experiment: 95 finance undergraduates were asked to make a decision to participate or not participate in a gamble on the heads and tails of a coin, and 41% chose to participate. In the second experiment, another 95 people with the same educational background were recruited to participate in the experiment. The difference was that the organizer gave them $15 in advance free of charge to participate in the gambling. As a result, 78% of people chose to participate. This is the famous "casino money effect": in casinos, people tend to regard the money earned from gambling not as "their own", but as "the casino's", and at worst they will lose it. In every casino in Las Vegas, as long as you check into the hotel, there will almost always be a few free chips in the room. This is the brilliance of the casino owner. Similarly, in general investment decisions, once similar investment decisions have made money in the past, many people tend to make two judgments: The first is what I just mentioned, using experience to judge that this investment is good, continue to invest or even Append. The second judgment: This money is earned for free, not mine. If you continue to invest, you will lose it at worst. As a result, we continue to see people continue to invest additionally during the bull market.
Regarding "attachment to the past" as a psychological misunderstanding does not deny the importance of summarizing investment experience. It must be admitted that behind the capital market are the most basic laws that maintain its operation, which are difficult to change. But we also believe that this immutable law has various forms of expression.
Take the market from the end of 2005 to the present as an example: In 2006, we were immersed in a long bear market mentality; the May 30 crash allowed us to completely overturn the junk stocks, concept stocks, and ST stocks that we had worked hard to summarize in the early stage; when we again It took us several months to finally discover value investing, long-term holding, blue-chip stocks, and resource stocks with great difficulty, but we suffered deeply from long-term holding.
It’s not that the capital market has no rules, but that we don’t understand it well enough. Our superficial understanding of its laws may lead to greater losses. So, we heard a saying from a senior person in the industry that we will never forget: Making big money depends on wisdom, making small money depends on technology, and losing money depends on knowledge.
The fourth misunderstanding: representative thinking and familiar thinking
Psychological research has found that the human brain uses shortcuts to simplify the analysis and processing of information. Using these shortcuts, the brain can estimate an answer without having to analyze all the information. This undoubtedly improves the work efficiency of the brain, but it also makes it difficult for investors to correctly analyze new information and draw wrong conclusions.
Representative thinking analyzes and makes judgments based on fixed patterns, believing that things with similar characteristics are the same. Familiarity thinking means that people like familiar things, and this is also true when making investment decisions. People often operate the same fund and the same stock repeatedly. If it is based on long-term and in-depth understanding of the company, the fund company and the fund manager, this operation is understandable. In fact, most people are not. They pay attention to or operate certain types of securities simply because "I often do this." It's like fans always support their local team. Let’s look at an example of a US 401k pension plan. The study found that 42% of 401k pension plan assets were invested in company stock. Because they are familiar with their own company, they often invest too high a proportion in the company, which is very dangerous. For example, Enron's plan invested as much as 60% in the company, and the company's bankruptcy resulted in a loss of US$1.3 billion in the pension plan. To sum up: Familiar thinking leads to two problems: first, overestimating the investment value of familiar investments; second, investment concentration increases significantly just because of familiarity. When the two problems are combined, it becomes a big problem.
Investment is a game of high IQ. In this game, only by defeating yourself can you defeat others. Since they are called psychological misunderstandings, they cannot be completely avoided, but understanding these misunderstandings can help us avoid this type of mistakes as much as possible. Finally, we once again recite Buffett's famous saying: Like most investors, I also have greed and fear. But the difference between me and most investors is that when others are greedy, I am fearful; when others are fearful, I am greedy.