One of the worst ‘bias’ of an investor/trader is ‘Overconfidence’. I wish somebody does a research on Indian traders – we need to depend on Finnish and American research about trader psychology. I have seen some amazingly over confident traders who have lost a lot of money for their families. I have seen doctors, Chartered Accountants, and businessmen bail out their family members losing the plot in a broker’s office. Elsewhere I have written about a doctor who paid Rs. 4 crores to bail out his son – obviously his FnO went wrong. I have also written by a woman whose marriage is in jeopardy for losing Rs. 2 crores of her husband’s portfolio. Luckily he had enough to lose. However, the marriage is ended.
The biggest problem with Overconfidence is that we do not even know that we are over-confident. I have seen young boys going long on one share and long on another. No clue from where they think that they can make money going against the trend! Generally we are confident that we are not over-confident. Who will tell us that we are wrong? An excel sheet of HONESTLY recorded trades – preferably with the TEXT on why we bought and why we sold. Capture the timing of buy and sale also. Most amateur traders do not maintain a diary. They do not even know whether they are earning or losing money on a month to month basis. This is ridiculous – almost all brokers give you a monthly income/loss statement. Ask yourself – why are you making losses in a rising market?
When we earn money we attribute it to our skill and when we lose money we attribute it to bad luck. I have spoken to many traders and have asked them to guess a range of outcomes – most of them cannot. They have very little conviction – and the fact that they do not have enough money to take delivery (even for a few weeks) means the stop loss gets triggered REGULARLY. Of course they are the voluntary contributors to the broker’s welfare fund, and why should I object. I have been a beneficiary in the past, have I not?
Illusion of control, and Illusion of knowledge – where the former is far more difficult to understand are the reasons for over-confidence. Even if there are companies which I have, I am not even monitoring their performance – clearly a case of over-confidence. However I still pick up the phone and talk to a couple of analysts who are tracking those companies. I am lucky to know such people. Of course companies like Reliance it is easy to find analysts, but in case of Supreme Industries and Coromandel International analysts are more difficult to find. However, I have no illusion of thinking that I know what is happening in those companies on a Q on Q basis. Broadly I know what is happening, but the details that one needs to know to invest or trade is far, far more than what I know.
Experience really helps – I don’t think I have initiated a trade for a very long time. When I say I have not initiated, I don’t mean I have not traded, just that I have not initiated it. My broker initiates it and I say Yes. I have a decently diversified portfolio -but the money was made in concentrated bits.
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