investing & human behavior ...
let me share a story with you: say it is Feb' 2018, market just dropped 10% (from 2850 to 2530), you got worried, so decided to meet an advisor / friend for an advice ... to make it interesting, say you meet two of them ... just to have a second opinion to validate the other ... & one of them tells you that the market is going towards 3000 (let’s call this guy as optimist), while the other person tells you that market is heading 2000 (a pessimist) - a 33% difference to make it really interesting .. although it's an example, but let me assure you that it’s based on opinions from real well-known people who appear in media
you return home, decided to sleep over it & then mysteriously i appear in your dreams (why would i show up in your dream is another story !) & tell you that i come from future and both the advisors are right and then i disappear ...
the key in this situation is your own behavior & how you react to these data points .. & here is how the story continues ...
you give a deep thought to the fact that the two targets are so far apart .. it’s Q1' 2018, economy is doing fine, things don't look so bad; so the guy predicting 3000 must be right .. why think as a pessimist ..? & how the hell both the advisors can be right at the same time ..? so, this dream guy is definitely a fake; he showed up simply to cause confusion; otherwise, why would he show up in a dream ..? market has been going up in last 8+ years etc. etc. so, you ignored the pessimist .. made an investment, say at 2600 & see it rising to 2950 - 13.5% up ... thinking optimistically was the right choice .. & of course, it was your decision ... investing in stocks is a piece of cake .. right ?
and then comes the Q4′ 2018 drop, market is at 2400 & your investment is in red; of course, you didn't sell the position at 2950 - who in his right mind sells something that makes 13.5% in a few months ..? it was based on one heck of a decision made by none other than YOU .. something definitely to impress your spouse and colleagues ... & to talk about at those cocktail parties ... as the market continues going down, you thought, hey, market will come back .. market has been going higher in last 8 years .. so you waited & waited ... & now it's middle of 2019 and the market is at 2000 (or something close) and you say, “what the ...? the pessimist was right” ... the optimist was an idiot ... “i shouldn’t have talked to him in first place .. i already knew that the market had to go down after 8 years of up move; who says stock market never goes down ..?”... “if i had shorted the market, i would have made 30%, or at least kept it in cash .. what’s wrong with keeping cash .. i wouldn’t have lost my capital?” ... & the dream guy was absolutely right who said that both the advisors are right ...!
what do you think, what happened here ..? ... even though the three guys gave you right advice, and their predictions came true, you may end up losing money because you didn't know your investment time-frame when you did the transaction, and how will you emotionally react to various situations as they emerge ..?
in due course of time, as new information becomes available, we justify a different set of actions, which would lead to a different outcome .. btw, it’s not just about you, it’s human nature ...!
& if you end up selling your position in 2019, thinking investing in stocks is/was a bad idea to begin with .. & whose idea was it to meet those two idiots in Q1′ 2018 ..? I am sure it was your spouse’s idea, as it can’t be yours ..!
after you sell the position, you watch the stock market rises big in next 5 years (this is your dream guy coming again from the future!) & your spouse reminding you each day ,“i told you so .. !” ... since she/he knows that you don’t listen to her/him anyway ... you are going to kick in somewhere ... something even the dream guy doesn’t wanna predict ..!
the moral of the story is .. human mind works with a set of beliefs which take a solid position in your head; and therefore, you may end up ignoring the facts, which are in opposition to you beliefs .. this set of beliefs make it difficult for us to switch directions .. as in above story, when market goes up for 8+ years, the mind is set to believe that market will continue to move up and hence we ignore any bad news; & once market starts going down, we set our mind in that direction and ignore any good news that may have turned the market around ...
to find more on this topic ... check http://www.yashikaventures.com
