22nd November 2011
After all, according to Soros, he's been wrong about investing more than he's been right. He says:
"It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong."
Investment guru Buffet adds: "Investing is simple but not easy."
Taking tips from these investment masters comes in handy during a stormy economic period with investors fearful of the next market swing. But sadly, for the typical investor, our behavioural weaknesses "trick us into giving up the potential big winners", warns a post on Psy-Fi Blog.
The blog says: "Our problem is that our biased brains punish us much more for failure than they reward us for success: so we prefer frequent small wins and few losses to frequent small losses and few wins. And, as Soros proves, our brains are wrong."
How we get it wrong
To put it crudely, there is a big difference between our ‘old' and ‘new' brains.
Brian Dennehy from independent financial adviser (IFA) Dennehy Weller & Co, says: "Our old brain is extraordinary, a marvellous tool we used when we lived in caves, enabling us to make decisions rapidly whenever there might be a hint of a threat.
"In contrast, the new brain (at least new in evolutionary terms) is more rational, thoughtful, but slower."
Our problem is that, often, when we invest, the wrong part of the brain jumps into action.
To use an analogy, imagine you walked into a shoe shop, considering a purchase for a certain price, and the shopkeeper announced you could have it half-price. How could you refuse? It wouldn't take the rational front brain long to work that out. Perhaps you would even buy two pairs. Now imagine you're visiting your financial adviser, intending to invest. He enters the room, and announces that share prices have halved. You run a mile. And yet, bizarrely, if prices had recently doubled you would be more likely to buy. That's not rational.
Avoid always chasing popularity
Buffet, for example, tends to identify companies that others choose to ignore. He goes against the crowd, and remains patient. However, the average investor finds this tricky. Most of us can be accused of chasing the ‘popular' stocks – you know, the ones whose names we recognise as ‘high-street stalwarts', say, or whose products we have at home and therefore choose to accept as a ‘good buy'.
Of course they may prove profitable. However, when you invest in one of these companies you're probably backing an odds-on favourite in conditions that don't favour it, as research given on Psy-Fi blog points towards here.
But often, we spread our investment portfolios among stocks we consider to be strong performers, and fail to bet big, and accept a large dose of uncertainty along with, potentially, a string of small losses.
Bet big on game changer sectors
Rohit Talwar, CEO of Fast Future Research, a global research and consulting company that helps governments and global companies to explore and respond to the ideas, trends and forces shaping the coming decades, says: "Fear of failure and being punished tends to push us towards lots of small scale bets whether it be stock market picks or corporate improvement. We rarely bet big for fear of getting it wrong.
"There is also little in most education systems that teaches these aspects of investment theory – most education tends to edge us towards safe, incremental choices favouring volume and safety over scale and risk.