Around 90% of short-term asset traders will underperform the market as a whole or will lose money entirely. The reason for this is a number of common mistakes made by most investors. By understanding these mistakes and the inherent human behavioral traits and biases they are based on, we can avoid them in our investing.
Time Not Timing
It’s about time in the markets, not timing the markets. The biggest mistake that investors make is thinking they can time market moves before they happen. This is often a result of overconfidence bias, the belief in an assumed ability to control the market. Dollar-cost-averaging, on the other hand, is a great way to ensure an outcome generally in-line with that of the broader market by making regular investments and holding them. It’s certainly possible to outperform the broad market through contrarian positions, concentrated holdings, or a combination thereof, but this is much easier said than done and carries a fairly high risk.
Stay Away from the Back of the Herd
The next common mistake takes place when investors fall victim to herd mentality. When investors blindly follow the tips and advice of famous investors, they will always be behind the curve and at the back of the aforementioned herd. When advising new investors, I often use the following analogy: “The market is a lion– everyone from little ol’ me to the largest institutions in the world comprise of a herd of gazelles. Lions eat gazelles but only from the back of the herd.”
Retail investors increasingly report getting their investment information from social media sites and platforms like YouTube. You can try to learn about investing strategies on YouTube and social media but If you try to keep up with the stock moves of an online influencer, you will always be reactive instead of proactive.
Relying on single indicators
In third place on our ‘most frequent investment errors list’ is when investors rely too heavily on single indicators, which they believe are the signals to buy or sell a stock. I would offer that no common technical indicator has outperformed the broad market over the last 100 years.
There are times where certain technical indicators may prove accurate. In these cases, I would suggest instead, that a type of self-fulfilling prophecy is occurring: if a large plurality of traders for a given stock are all seeking the same mathematical “signal” prior to buying/selling, then the same plurality of orders will hit once the signal occurs. These indicators only have real power because enough people have decided to act on them, not because they’re inherently accurate. Ironically, the primary purpose of technical analysis – to remove emotional decision-making from the investment equation – has in many instances given way to “bandwagoning” disguised as math.
Using Game Theory for Investments
My business partner and I have been studying investor behavior in an effort to understand how and why investors make the decisions they make. We have measured investors’ psychographic trait distributions and applied them to irrationality-corrective deep game theory to create OVTLYR – an online tool that predicts market sentiment to determine when a stock’s valuation is inflated or undervalued due to investor hype rather than actual value. This happens far more often than one might assume.
As a tool, OVTLYR can help investors avoid making common investing mistakes based on cognitive biases by providing visibility on what the rest of the market is thinking. This is the power that behavioral analysis has when it comes to stock market trends. OVTLYR allows a traditional long-term investor the ability to more clearly identify opportunities that exist among established US companies. At the time they’re looking to either add to their investments or rebalance existing holdings within their portfolio.
Understanding Investment Behavior
Essentially, OVTLYR has turned herd mentality into an exploitable advantage. Like traffic reports on a navigation app, this new analytical tool provides summary visibility on market participant inclinations, so that our users can identify where the herd is likely to turn next. When you know where everyone else is moving, it allows you to consistently position yourself to benefit from forthcoming market movements – rather than suffer from them.
Understanding these common mistakes in investing is key to, not only in making sure you don’t commit them yourself, but also imperative to predict how other investors are likely to act. If you pay attention to market behavior and avoid these common mistakes, you can stay away from the back of the herd and away from the lions.
Investor behavior experts Mark Gorzycki and Mahesh Kashyap are the founders of OVTLYR. By analyzing investor behavioral data, the tool they have created, now in the pilot phase, can distinguish when market changes are a result of legitimate valuation changes and when they are simply due to media hype.