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I’m a Gambler and Why You Make The Same Mistakes

June 26, 2013 | About:
I have a confession.

I’m a gambler.

I lack a lot of things when it comes to investing, but I’m sure I am not the only one.

First, let me explain what I mean by “gambler.”

The Gambler

Gamblers are “investors” who, more likely than not, invest in companies using gut feelings and baseless pseudo-scientific calculations to back their decisions. But more than that, gamblers are nervous, impulsive and tend to always jump the gun.

Successful investors have their minds under control through experience, genetics, or just sheer will power.

For years, psychologists studied what constitutes human decision-making. They discovered that humans are pretty much systematically irrational.
We tend to consistently act in an irrational manner in certain situations and when making certain decisions. When this discovery was later applied to investing, the field of behavioral finance was born.

Rediff
Morgan House from this Motley Fool article also tackles the phenomenon called cognitive dissonance:
It’s the term psychologists use for the uncomfortable feeling you get when having two conflicting thoughts at the same time. “Smoking is bad for me. I’m going to go smoke.”
Is it possible to become a real investor than just be a gambler?

Yes.

So How Do You Stop Gambling?

First, recognize the need for improvement.

Do not be content with what you already have. Always strive to know more and always strive for the best.

If you don’t want to be a gambler then you should get your emotions under control by knowing your tendencies when the going gets tough.

Here’s a previous article from OSV about the need to understand your emotions.

But what about the following?

Blaming Wall Street

Do you blame Wall Street for your investment decisions to feel better?

Instead, learning from your failure can only improve you as an investor.

Holding onto Losing Stocks Too Long

Do you hold on to a losing stock just to prove you are right?

Ask yourself, is this just a matter of stubborn pride or is there a fundamental reasoning to this decision.

Wanting People to Say What You Want to Hear: Confirmation Bias

Are you looking for articles or people to confirm your thoughts on a particular investment?

Do you Google phrases like “no need for vaccination”? Naturally, since your keywords are so specific, the results you get will match what you want to find.

Overconfidence. The Silent Killer.

Here’s the kicker. Overconfidence.
Total certainty or greater certainty than circumstances warrant
Get on a good roll and you feel like you can conquer the world. Confidence is important, but overconfidence is a killer.

Lesson of the Day?

Follow the charts below.1280386466.jpg

1885084307.jpg

Avoid being emotional, biased and overconfident.

The side effect of this is that more people will like you though.

The best advice I hear from veteran investors is to know yourself. Know your own quirks and be objective about it. Listen to different opinions by always having an open mind.

Easier said than done of course.

About the author:

Jae Jun
Founder of Old School Value (http://www.oldschoolvalue.com) dedicated to offering the most complete and detailed stock valuation and analysis spreadsheet. Investing made easy by importing 10 years of financials and 5 quarterly statements directly to excel for your analysis needs. Save time, make smarter decisions and make more money.

Visit Jae Jun's Website


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