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Are You An Overconfident Investor?

If yes, you will relate to this chart. If not, this is what overconfidence will do to you.


“How can I be wrong?”
It can easily be claimed that no problem in human judgement and decision-making is more prevalent and more potentially dangerous than overconfidence.

We are generally overconfident in our abilities. In addition, we tend to be overconfident in our predictions.

The worst pitfall of overconfidence is that it gives us an illusion of control. When we have no control over some event, we frequently act as if we have some sort of control. As investors, we think that we can direct the movements of the stocks we hold.

This is just because we are overconfident that we are always correct in our decision making. The result of this is mostly desperation, loss, and fear of future outcomes.

Overconfidence is possibly the most rampant emotion in the stock market.

When times are good, investors become overconfident and believe that stock prices will rise to the skies. And when the tide turns, and markets crash, these very people are overconfident about ‘death of equities’.

The above chart is an exact representation of how overconfidence drives investors to make mistakes…again and again.

How to throw out overconfidence from investing?
While it is difficult to negate your own opinions while investing in stocks (“How can I be wrong?”), it pays to be a realist instead of being overconfident.

The next time you’re about to buy a stock because you’re sure (or overconfident) it is going to be the next multi-bagger, take the time to have what I call the ‘overconfidence conversation’ with yourself.

  • Ask if you are being overconfident in your assumptions to buy a stock.
  • Ask what impact the decision will have if it backfires.
  • Ask if you have made a similar assumption in the past that has turned out to be incorrect.
  • Question yourself. Question your judgement.
  • Pay attention to people who are questioning your judgement.

In short, play your own devil’s advocate.

After all, knowing the consequences of being wrong might lead you to make more careful decisions.

You will also come to appreciate the enormous potential price you might have to pay for your overconfidence.

So, have you ever been overconfident in your investing in the past? If yes, what has been your experience – good or bad?

Share your story with us, or post your view on our Facebook page.

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About the Author

Vishal Khandelwal is the founder of Safal Niveshak. He works with small investors to help them become smart and independent in their stock market investing decisions. He is a SEBI registered Research Analyst. Connect with Vishal on Twitter.

Comments

  1. Hi Vishal,

    I like the Graph very much, and my question on the other post about Comfort level is properly shown here, Just with a example as you have shown, If i think the business is good and but at the time the investor bought in this example and then not buy again if its growing but buy more if its declining. and then the crash comes and brings it to the level of 30 or 40 as shown is graph how would one know or decide on the comfort level? we are talking about a decline which is around 70 80% , i am sure that that kind of decline may shatter anyone confidence or commitment towards investment in stock. how do we handle this situation.

    I understand that sometimes it all panic but how do you differentiate between panic and bad business.

    Thanks
    Vikrant.

    • That’s where a continuous review of your investment decisions comes into picture. Try visiting your investment checklist every time you have a doubt. If the stock passes the checklist even ion bad times, hold on to it. Otherwise sell and use that money to buy a stronger business that is selling at cheap prices.

      The checklist is a very important tool to help you distinguish between panic and bad business. Just try it out once and you’ll know its importance.

      Regards,
      Vishal

  2. pradeep gowda says:

    This over confidence hurts one not only in inevesting but it can hurt you in personal life also.
    Over confidence will lead you to a point where even if someone is adivsing you with a proper logic and is advising for your own good, you would still think that you are better off that the person advising you or rather the other person is just too dumb or is jealous of you and doesnt want you to succeed.

    I feel what you have said is very much correct that one should question oneself and also think reflectively as to what the other person is trying to say or why is he saying it.

    • pradeep gowda says:

      I had a similar bad experience more than once where the price was very high ti pay financially and personally.

Trackbacks

  1. […] As an investor, you must avoid arrogance at all times. So what if your last stock-pick turned a multi-bagger? Watch out for overconfidence bias. […]

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