Daniel Kahneman and Amos Tversky proved that humans are not actually rational creatures. That discovery is famous today by the term “cognitive biases,” which shows that humans are not rational as far as an asset management company and do not make choices with logic to make more money. Instead, systematically they make choices which clearly defy logic.
Well, these biases can be there naturally and being influenced by them also is not the worst thing often for the asset management company. Actually, surprisingly these biases have helped make more money for so long. It should also be considered that while we do not always make decisions based on logic and rationality to make more money.
However, if we were to look at investing specifically then it can be said that these biases can lead us to a great trouble. And the biggest irony is the more we read and start to know about these, we tend to believe that we are not affected by them as much the others are. Value investors are considered very professional and experienced in what they do. They generally have their emotions and other stuff under strict control.
Value investors are generally expected to have a diversified investment portfolio and they are supposed to avoid biases. But after all, all of them are humans. And being humans, most of them in spite of having a Diversified Investment Portfolio tend to make mistakes to make more money.
Here are the much discussed 9 biases of value investing:
1. Stocks that are under-researched bias
A big number of value investors, even the best ones, are always keen to enjoy the process of making a diversified investment portfolio and are less concerned about the profit part. Though it looks like fun to discover such new ideas, the downside is pretty horrific too. They never know which “new discovery” alone is enough to drown them.
2. Totally cheap bias
People who follow Ben Graham can understand this type of bias very clearly. Value investors generally try to earn higher returns through stocks which stay at complete cheap valuations.
Though this is just the start, it is rarely expected from value investors of this kind who are comfortable with a valuation of 30 – 40 times. Finding complete cheapness can cause someone to miss great opportunities.
3. Not doing anything bias
This is the bias behind which most of the investors take shelter when they are not comfortable or sure about what to do next. If they think the market is going to fall then they will not buy anything to earn higher returns however cheap it may be. This dangerous bias can cause an overall destruction.
4. Being skeptical bias
Most of the value investors are very conservative, pessimist and skeptical about the state of the stocks. This kind of attitude can cause a lot of loss in as far as great opportunities are concerned.
5. Trying to do things differently bias
Value investors have been known to be obsessed with doing things in a different way. That can sound quite frustrating to some people, which is not good at all in this career.
6. Have to be a value investor bias
Everyone today seems to be wanting to be a Value Investor as it is very fashionable nowadays. But there are many other ways to earn money. Forcing oneself to be a value investor is not going to do any good.
7. The zeal of competence bias
Having a zeal or circle of doing something differently is pretty good. It can help in many ways but not being sure about it or being confused can also introduce chaos in the career.
8. Ignoring small details bias
Most investors are obsessed with greater good like profits and ROI before investing while tending to ignore smaller details. This biase can cause unprecedented losses after the investment.
9. Careless management bias
Many people tend to ignore companies just because it seems to them that the management is careless or bad. But each time that may not even be a big factor that makes one conclude it as bad investment.
These 9 biases of value investing are quite subconsciously applied by many to earn higher returns but if one takes efforts and keeps them away from the investing thought process then it is the best thing for their portfolio!