3 reasons I lost a lot of money and how I overcame them

losemoney

This is a story on my investment in a company that build ships for the oil industry called Vard in 2013. I’ve lost over S$10,000 because the stock has collapsed 85%. Yet, I’m still holding on even though I know I’m being stupid.

We love to believe we’re all special snowflakes that are individual and different but humans are way more alike than we like to think. People in their 20s wish they’d travelled more, in their 30s they start getting concerned with retirement, and by their 40s, people get increasingly worried about retirement.

When we’re younger, we save for ourselves, and as we get older, we care about saving for our family.

These trends are similar for most people.

Most people who start picking stocks think “I’m not like that, I won’t make the same mistakes”.

But there are multiple psychological traps that make most of us bad stock pickers, I’m covering three of the most common ones below.

I looked for things to confirm my thoughts

I first thought Vard was a good investment because it was recommended on Calvin Yeo’s blog. He seemed knowledgeable enough and his analysis was sound. Of course, I didn’t just believe him. I went to ShareJunction to look at what people were saying about Vard. I cross-checked with friends into investments like me. I looked at different analyst reports from Kim Eng, DBS and UOB.

My mistake was this: I looked for views that confirmed Vard was a buy and dismissed contradicting information. When I read the analyst reports, I looked for those that indicated that Vard was a buy with a target price of $1.50. The one report that said to sell based on the problems it was having with Brazil I dismissed almost immediately.

The science:

In social psychology, there’s this little concept caught cognitive dissonance. It sounds technical but all it means is we love information that confirms our views, and ignore opinions, no matter how valid, that undermine our perception. The Internet is making this worse because there are now so many different opinions out there, we’re guaranteed to find someone that agrees with us.

Our brains weighs information based on the emotional or social consequences of being wrong. Once the brain decides that contradictory information being right would mean pain and humiliation, it will then tell the logical part, “Figure out a way to use your ‘logic‘ stuff to make this pain go away.”

This little quirk explains how people can believe that:

  1. Global warming is a myth
  2. Scientology is not a scam
  3. Evolution is just a theory

I let the past cloud my judgement

When I bought my first 5 lots in Vard at $1.28, it went all the way up to 1.40. I didn’t sell and it subsequently went down again to $1.07. So I did what I thought was rational, buy some more! When it went up to 1.14, I knew I was right! I just have to ride this out, wait for $1.40 and sell it.

Rationally, the fact that it was at $1.40 before, that has no bearing on whether it will ever hit that price again. The price of a share one day is statistically independent of price on another day.

The science

Priming: how our brains react on one event can be influenced by what happened in a previous event.

Read the next 2 questions really fast.
What mouse walks on two legs?

Mickey Mouse!

What duck walks on two legs?
Donald Duck!

Did you think the second answer was correct? No, it’s not. Because all ducks walk on 2 legs. You were thinking Donald Duck because you were previously thinking about Micky Mouse.

In one study, scientists got volunteers to form sentences using words associated with aggression. This was done under the guise that it was a language proficiency test. Those who were primed with words like (aggressively,” “bold,” “rude,” “bother,” “disturb” and “intrude”) interrupted the experimenter far more frequently that those primed using passive words like (“understanding”, “patient”, “kind”) during a conversation after the tests.

I was terrible at cutting losses and still am

The slide for Vard has been non-stop since 2013. It’s not priced at $0.16 and I’m STILL holding on to it. I told myself it would get back up at $1, at $0.50 and even now where it’s already a penny stock. Yet even now, when I know I should sell it, I can still think of reasons to hold on. All the oil stocks are doing badly because oil is too cheap, I should wait for the oil crisis to be over. etc etc.

The science:

Remember that time you bought something totally unnecessary, faulty, or overly expensive, and then you rationalized the purchase to such an extent that you convinced yourself it was a great idea all along? Especially if it was a huge purchase.

Yeah, that’s post-purchase rationalization in action — a kind of built-in mechanism that makes us feel better after we make crappy decisions. Social psychologists say it stems from the principle of commitment, our psychological desire to stay consistent and avoid a state of cognitive dissonance.

And you know what? Buying large lumps of stock is especially vulnerable to this bias.

How I overcome these problems today.

I still haven’t sold my shares in Vard. What I’ve done is finally admit to myself that I’m not good at picking stocks. I can’t act rationally when it comes to investing my money. When a stock is high, I’ll wait for it to get lower. When the stock is low, I’ll wait for it to get even lower until it bounces up again. LOL.

That’s why these days, I automate my investments with a regular savings plan into 2 different indexes. The S&P500 and the STI index. For a step-by-step guide on how to get started doing that, click here.

Along with my CPF, I’m confident I will build enough retirement funds.

There are a lot of people who believe they can beat the market. When it’s been shown time and time again that even professional fund managers struggle to do so over the long term. Everyone thinks they are less susceptible to biases than others. That they will succeed where everyone has failed.

This three-part study hilariously proves my point on how we tend to overestimate ourselves

In part one, experimenters had subjects rate how susceptible they were to different biases compared to the “average American”. Not surprisingly, everybody rated themselves as less susceptible.

In part two, they brought back people who said they were less susceptible to bias. They showed how biases could affect them without them even knowing it. These people insisted they were as unbiased as they claimed.

Finally, in part three, the experimenters showed people the results, “Look, everybody rated themselves above average. That’s impossible. Do you believe you overrated yourself?”

The subjects shook their heads. It was shameful that everybody else participating had overrated themselves. These people proudly continued to rate themselves the same.
Be honest, do you really think you can act rationally when money is involved?

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Comments

  1. One Robin doesn’t make a Spring.

  2. Frederick says:

    Yes, it is about psychological or emotional aspect in investing especially on amount that affects the individual owner.

    We have no control over the movements in the market esp. the U.S. stock market. What we have control is our actions or reactions to the movements. It starts with our emotion or psychology which then affects the brain logic system. Fight or flight mechanism replaces all the logics until it is too late. Novice gamblers become numb when they try to regain their loses instead playing every stake on its own merit and logic. Then again it very much depends on individual’s mental make-up esp. the discipline and patience elements.

    We should formulate rules for shares trading like those in gambling:
    1. Don’t lose money2. Remember rule no 1. 3. Do not let previous trade(s) interred with current play. 4. Stick to game plan 5. Set a budget for each play including stop loss or exit. 6. Write down reasons for buying the counter, it’s stop loss and exit strategy and grounds for its run if any. 7. Allocations and maintainance of reserves at all times. 8. One foot on the ground at all times.
    Your buy and hold strategy mindsets should not be cast in stones. The inter-connected world is so link that even the most stable counters like banks maybe affected. Today’s volatility, interconnectivity and negative interest rates warrant serious rethinks of assets in ‘buy and hold’, more diversities of portfolio allocations, and liquidity,

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