Benjamin Graham once famously said: “The investor’s chief problem — and even his worst enemy — is likely to be himself.” So, what is it that drives these frequent blips in investment behaviour?
Over-confidence is probably the single most lethal error. It may seem bizarre, but repeated academic research has proven that the more complex the task, the more inappropriately over-confident we are. Not surprising then that most investors are blissfully unaware of their blind spot! Common illusions related to this misplaced sense of confidence are the belief that it is possible to consistently time the market as well as develop superior stock-picking skills based on fairly limited effort and information input.
In many ways, spectacular predictions resemble a broken clock. Even the stopped clock is right twice a day. Two dirty tricks conspire against the vast majority of investors when it comes to being self-assured. The first error relates to the classification of success and failure. Typically, we remember and talk about those parts of our investment strategy that have done well and forget or try to erase from our consciousness the bits that have gone wrong. Second, virtually all of us find it far more agreeable to ascribe success to skill rather than luck.
(This story appears in the 07 October, 2011 issue of Forbes India. To visit our Archives, click here.)