Investor Health Check - Part 3 of 3

Are you suffering from any of these common investor blind-spots?

In Part 1 and Part 2 of this three-part series, we looked at four of the five 'blind-spots' commonly suffered by investors that will jeopardise your long-term investment success.

This list of 'blind-spots' has been summarised from the work of Daniel Kahneman, an eminent psychologist and Nobel laureate, notable for his work on the psychology of judgment, decision-making, and behavioural economics.

Below we discuss 'blind spot' number 5; 'Regret Paralysis'.

5. Regret paralysis

Due to the uncertainty inherent in investing, investors are likely to frequently experience regret, and their investment decisions are likely to be influenced by those feelings of regret when they arise.

This can cause investors to make poor decisions today because of regrets over decisions of the past.

People are more prone to regret when they incur losses as a result of their investment decisions than they are when their decisions cause them to miss out on additional gains.

When people have cause to regret a bad outcome, they ponder reasons why it happened and, in doing so, tend to 'fixate' on the unusual aspects of the events that led to the unwanted outcome.

Rather than learning from the experience, and/or accepting that bad outcomes are a normal part of investing, they can often remain like a 'deer in the headlights' for extended periods of time, missing out on future opportunities.

Let's Come Full Circle

Our 'Investor Health Check' has focussed on the 'blind-spots' often suffered by investors that willjeopardise long-term investment success.

We can come full-circle now, and with some liberty, re-state Mr Kahneman's work as a set of investment rules.

We call these Kahneman's Keys to Investment Success:

1. Think Quality, Think Long Term, Think Broadly

Know why you are investing, know your objectives, consider the risks, and invest accordingly.
Do your homework, invest in what you know (industry, company, management), diversify your investments, and then take a 'portfolio view'.
Do not focus on daily, weekly, or even monthly price movements. Realise that individual investments will go up and down in price - short term price movements reflect the often irrational 'consensus' between the keenest buyer and the most pessimistic seller.
Over the long term, it is the average performance (capital and income return) of your entire portfolio that matters.

2. Be Disciplined

Do not 'over-commit' capital to one investment idea/theme.
Do not 'chase' a popular stock because you feel you have missed out.
Stick to a set of disciplined rules for investing.
Remember, you have a limited amount of capital, and a limited amount of time - use it wisely.

"I call investing the greatest business in the world because you never have to swing. You stand at the plate, the pitcher throws you General Motors at 47! U.S. Steel at 39! and nobody calls a strike on you. There's no penalty except opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it." - Warren Buffett

3. Be Humble

Do not think for a moment that you or any so called 'expert' can peer into the future with 20/20 vision.
Accept that investing involves uncertainty and there are many factors that are outside of your control.
Events like the GFC happen - they are not your fault, they are not your adviser's fault.

"Anyone can be an expert when observing from the rear-view mirror. Our requirement as investors however is to make rational decisions while looking through the windscreen. - Warren Buffett

4. Stay Unemotional (this is hard)

Do not look back at your losses and let fear paralyse today's decisions - focus on your investment rules.
Do not look back at your losses and over-commit new capital in the hope of 'redeeming yourself'.
Do not look back at your gains and over-inflate the estimation of your abilities to time the market.
Keep a cool head, stick to your game-plan, take the gains, and try to learn from your losses.

We hope that you have enjoyed and gained value from this series. If you did not join us from the start of this series, we encourage you to Part 1 and Part 2 before re-visiting Eden's take on Kahneman's Keys to Investment Success.

Daniel Kahneman - Nobel laureate

Daniel Kahneman is an eminent psychologist and Nobel laureate, notable for his research and insight into the psychology of judgment, decision-making, and behavioral economics.

His body of work is fascinating, and you can read more about Daniel at the Nobel Prize offical website.

Below is an extract from Daniel's autobiography:

"In one experience I remember vividly, there was a rich range of shades. It must have been late 1941 or early 1942. Jews were required to wear the Star of David and to obey a 6 p.m. curfew. I had gone to play with a Christian friend and had stayed too late. I turned my brown sweater inside out to walk the few blocks home.

As I was walking down an empty street, I saw a German soldier approaching. He was wearing the black uniform that I had been told to fear more than others - the one worn by specially recruited SS soldiers. As I came closer to him, trying to walk fast, I noticed that he was looking at me intently. Then he beckoned me over, picked me up, and hugged me.

I was terrified that he would notice the star inside my sweater. He was speaking to me with great emotion, in German. When he put me down, he opened his wallet, showed me a picture of a boy, and gave me some money. I went home more certain than ever that my mother was right: people were endlessly complicated and interesting."

Please note that the information contained in this report does not constitute financial advice. This information is for educational purposes only. All advice provided by Eden is delivered via a written personal Statement of Advice.

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