Your stocks have been sky rocketing lately, doubling or tripling in just a few weeks. While there might be a few warning signs of the market turning sour, you’re so confident in your investment decisions that you cast them aside as nuisances. After all, when you’re as good as you are, why worry?
In investing, pride usually takes the form of overconfidence, and often leads you to make the same mistakes over and over again, missing the lessons and warning signs of your errors.
Sin #7: Pride
It’s difficult not to be prideful. That’s because we usually feel good about the things we do well and have a slight inclination to blow our own horn. In fact, a Swedish psychology journal found that it’s actually a human survival instinct to be overconfident, which is a fatal downfall for investors. Why is it so terrible, you might ask?
The Danger of Overconfidence
Overconfidence in its definition means you place too much trust in your initial judgement, regardless of any other information. Overconfidence means you are open to making misinformed decisions because you don’t weigh research, history or advice against your gut. All the other seven deadly sins come rushing up under the handle of overconfidence – lust, gluttony, greed, sloth, wrath and envy. It’s a gateway to all the wrong decisions.
Sure, your gut feeling is a vital aspect to investing and can be used to feel out which stocks might be ripe for the picking… but if this isn’t balanced with adequate research, then you’re walking into a potential disaster zone. Investors who do this end up repeating their mistakes, as they have no reflection to learn from past errors.
Question Your Gut
Instinct, gut, that nagging thought in the back of your mind – whatever you want to call it, that part of you needs to be questioned. The wonderful gift of hindsight is a magical thing in the investing world, because judging your current decisions against past decisions will allow logic to rule emotion (rather than the other way around). Look back and judge your previous investment decisions, then use that reflection to understand what you need to research for your current decisions.
We aren’t saying that confidence is a bad thing. In fact, confidence is necessary in investment, because you can’t constantly be doubting yourself. But overconfidence is another matter entirely. Overconfidence is an overreliance on your gut, which is giving into your emotion. This a huge danger sign, if there ever was one.
Take time to question yourself. Be your own devil’s advocate before following through with a decision and make sure that your gut feeling is an accurate assessment of your situation.
The easiest way to avoid overconfidence that we can suggest is to subscribe to an smart stock picking and portfolio management tool, which guides you along the way and aids your decisions. Value investing rebukes overconfidence every time, but sometimes you do need someone looking over your shoulder to help you avoid it.
If you like the sound of this and want to make value investing easy, why not hop on over to our features page and learn just how you’ll benefit from a stock picking and portfolio management tool.