Investing success in choppy times

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A study conducted in 2009 had discovered that individuals are prone to search for information which confirm their personal beliefs. Since choices come only after thought, this can turn out to be costly mistake. This is specifically when money is on the table.

Confirmation bias

The existence of the bias compels you to become increasingly certain of the notion you are correct with the more knowledge you take. You subsequently get a partial picture of any situation. A survey conducted by CFA Institute in 2015 established that investor judgment is badly influenced by confirmation bias. It ends in bad investment choices. A good example of this is gold-bulls actions over the recent decade.

Values of gold rose over 60 percent for three years post the financial crisis in 2008. Investors who thought gold will rise more invested, pointing out the monetary and economic mistakes in the period. Pro-gold investors had the belief that the yellow colored metal will continue to move up in values. Investments are made to make use of this future.

The price of gold has since dipped by 35 percent from the metal’s 2011 peak. During the time period of its decline, many investors ignored all the associated bearish signs like a robust US dollar. They instead concentrated on reasons as why gold had made an entry into new bull markets. These investors later paid a heavy financial price.

Mistakes and Buffet

Many other investors can also be accused of the same mistake. A study conducted in 2010 found that investors preferred ideas which matched what they thought on the stock message boards of the internet. To give an example, a strong purchase view of any stock will result in the click of bullish posts concerning it. This study then came to a conclusion that a maximum segment of biased investors tend to be over confident in what they believe due to their confirmation bias. It is found that if the bias rose by one standard deviation, it resulted in too much trading. Returns decreased by over nine percent.

Warren Buffett, arguably the best investor in existence, knows how confirmation bias works and he tackles it in his own inimitable way. At the annual general meeting of Berkshire Hathway in 2013, he sent an invitation to an extremely vocal critic-Doug Kass- to participate. The reason? The billionaire investor knows that he must be receptive to a number of conflicting thoughts.

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