The heading is taken from a book by Daniel Goleman with the same title. Daniel refers to emotional intelligence (EQ) as self-awareness. “It is about understanding the bad decisions we make and being able to monitor and manage our behaviour”.
George Goodman author of The Money Game wrote: “If you don’t know who you are, this is an expensive place to find out.” By “this” he meant the stock market.
When it comes to investing in the stock market the average investor’s EQ is very low. We are prone to several cognitive bias errors some of which are listed below:
- Loss Aversion
Using the graph of the JSE All Share Index for the past 5 years I will illustrate how these bias errors manifest.
Any investor who was lucky or “foolish” enough to have invested March 2009, after the collapse of Lehman Brothers, will quite naturally think he or she is the next Warren Buffet and thus be prone to the before mentioned cognitive bias errors.
- Investing in the stock market is easy – Over-confidence
- The market will keep going up, it always does – Recency
- South Africa is the best stock market in the world – Framing
- SA markets will benefit as the gateway to Africa – Confirmation
- I know the JSE will get to 50 000 points by year end – Anchoring
- I am going switch into cash before the US attacks Russia – Loss Aversion
I am concerned that investors have forgotten that stock markets can also go down and stay down for a very long time. We have become so accustomed to double digit positive returns year on year, it seems to be a one way ticket to wealth creation.
I am not predicting a crash or trying to discourage anyone from investing in the market. I just urge you to temper your expectations, invest for the long-term and don’t focus on short-term speculative returns.
Mcomm, CFP®, HdipTax
T. 021-851 3746