As individuals, we all have certain biases and beliefs. They stem from different sources and profoundly impact how we think and go about things in our daily lives, including investments. While some notions, such as discipline and patience, help in the investing journey, certain biases can prove to be achilles’ heel for you.
These biases not only hamper your investments but also prevent you from augmenting your riches. They act as a roadblock in attaining financial freedom and addressing life goals. Here are the four biases you should steer yourself away from.
1. Herd Mentality Bias
There must have been occasions when you have been tempted into investing in a financial instrument just because you have seen your peers and others doing it. It’s a fact that most of us end up chasing financial tools that others invest in, believing that such a move will help them build wealth and that they can not go wrong.
Do you remember the dotcom bubble? During that period, many people ended up investing in companies that didn’t possess robust corporate governance models and strong balance sheets. The results were disastrous.
In a nutshell, adopting this mentality can spell doom. You must make any investment understanding the product structure, the associated risks, and aligning them with your goals and risk appetite. Of late, many new fund offers (NFOs) have come to the fore promising attractive returns. Many investors have even invested in them.
However, before you invest in any such fund, make sure to understand the company’s fundamentals and analyse its long-term growth prospects. NFOs don’t have a track record, and investing in them just because others are doing can cause wealth loss. To simply put, don’t follow the herd but carve your own path.
2. Recency Bias
We are severely influenced by the recent happenings in our life. So much so that we quickly tend to forget the past. In this bias, we tend to give more importance to the recent happenings over historical ones. Multiple times investors have fallen for this bias, only to rule later.
This bias came to the fore in March 2020 when equity markets nosedived hit by uncertainties amid the coronavirus pandemic. Investors’ wealth made over time eroded in no time. However, this was not the first time that Indian equity markets had crashed. It happened during the 2008 financial crisis and 1992 stock market scam, only to bounce back stronger.
However, investors gave so much importance to the happening that most pulled out and exited markets fearing further loss. In the process, they converted notional losses into actual ones. Markets scaled new highs and rewarded those who remained committed to their investments.
Those who had remained invested during that challenging phase are now sitting on meaty gains. Hence, it’s advisable to look at the big picture and not bank on short-term trends. Irrespective of whether you are investing in a stock or mutual fund, evaluating how long you must stay invested without giving into short-term trends is important.
3. Confirmation Bias
Renowned Swiss author and entrepreneur Robert Dobelli in his bestselling ‘The Art of Thinking Clearly’ has called it the mother of all biases and rightly so. It refers to the human tendency to interpret things to confirm existing beliefs, and any notion that contradicts it is weeded out without a second thought. Those with this bias don’t want to take the stress that accompanies conflicting views.
Confirmation bias not only robs you of your ability to think logically but also gives you a false sense of overconfidence. With this bias at the back of your mind, you will always feel that you are in command of your financial decisions and can never go wrong. However, it’s not so. This bias – more often than not – gives you a false sense of hope, and you may end up investing in an instrument with poor attributes.
That’s not all. You may end up sticking to a loss-making investment with the hope that things will eventually turn. However, by the time you realise your mistake, the damage is already done. So, it’s prudent to face facts and mould your thought process accordingly. When it comes to investments, it’s vital to keep an open mind and go ahead accordingly.
4. Loss Aversion Bias
We all hate to lose, isn’t it? When it comes to investments, the focus radically shifts towards avoiding losses more than making gains. In the process, they lose out on chances that can augment their gains. In the long run, this can prove to be detrimental to wealth creation. While it’s prudent to adopt risk-mitigating strategies, it’s equally essential to look for opportunities to bolster gains.
Also, due to this bias, investors continue with loss-making investments because they want to avoid the pain of making a loss. However, it drags overall returns and proves to be a roadblock in achieving financial freedom.
How To Overcome Investment Biases?
By now, you must have realised that these biases pull you back and prevent you from leveraging your investments’ potential to the maximum. So, how do you overcome them? Let’s find out.
Be Logical and Analytical in Your Thinking
You can mitigate and overcome a lot of these biases by being logical and analytical in your thinking. An analytical approach will help you go deep and understand the nitty-gritty crucial for getting your investments right. Do your research and make sure to make investments in line with your goals and risk tolerance.
Understand Your Financial Position
Just as we differ as individuals, so do our financial positions. Note that investments don’t follow a one-size-fits-all approach. So, it’s advisable not to base your decisions based on other’s financial position. Have a holistic view of your positioning and adopt a strategy accordingly.
Investing emotionally can lead to flawed investment decisions and fall for any of the biases mentioned above. Hence, you must have a check on your emotions and adopt a rational approach. Weeding out emotions from investments can help you make decisions that can enhance your riches by a significant margin.
Take Help from a Financial Advisor
Professional help is always beneficial in every sphere of life, and investment is no different. If you are finding it difficult to overcome the biases yourself, seek help from a financial advisor. Financial advisors are qualified professionals who help you sort money matters and overcome preconceived notions and beliefs, and they aid you in thinking logically.
Biases stem from various sources, including the environment where we grow up and how we see people around us going about their investments. However, it’s essential to understand that wrong beliefs and notions can significantly hurt your finances and deprive you of wealth creation opportunities.
SoftBank to Expand Vision Fund Staff for More Japan Investment – BNN
(Bloomberg) — SoftBank Group Corp. plans to expand the Japan investment team for its Vision Fund, adding staff and stepping up deal-making after putting little of its money into its home country in the past.
Founder Masayoshi Son raised about $100 billion for his first Vision Fund and has allocated $51 billion for a second, but he has made most of his investments overseas, particularly in the U.S. and China. Only two of his investments have been in domestic startups.
That is beginning to change however. The Vision Fund team in Japan, overseen by Kentaro Matsui, is actively hiring to expand beyond its current size of four members. It’s looking to fill positions for analysts, associates and vice presidents, although there is no fixed target for the number of hires in the future, according to a spokesperson for SoftBank Investment Advisers.
The regional breakdown of SoftBank’s portfolio is 42% in the Americas, 28% in Europe, and 15% in China. However, the Chinese government has increasingly tightened regulations on technology companies and SoftBank will likely need to diversify its investments in the future.
“Japan is the world’s third largest economy and presents a compelling opportunity for high-growth tech companies,” Matsui said, in written response to questions. “We believe Japan is emerging as a center of technology innovation, particularly in sectors such as biotech and frontier tech, which are poised to drive growth in the modern economy. We are tracking its growth closely and will continue to look for opportunities to grow our team and presence in the region.”
SoftBank’s made one investment in Japan by taking a stake in the pharmaceuticals startup Aculys Pharma LLC. It also invested in SODA Inc., a startup that operates an online marketplace for sneakers and streetwear.
In an interview with Bloomberg, Aculys CEO Kazunari Tsunaba said the investment by the Vision Fund was important and valuable for the startup. He said the firm is considering an alliance with a U.S. sleep-focused company that Vision Fund has invested in, without specifying the target name.
©2022 Bloomberg L.P.
Why the sustainable investment Craze is flawed – Livemint
ESG funds, as they are known, promise to invest in companies with better environmental, social and governance attributes, to save the planet, improve worker conditions or, in the case of the US Vegan Climate ETF, prevent animals from being eaten.
Money has poured into ESG funds as noisy lobby groups push pension funds, university endowments and some central banks to shift their investments. The United Nations-supported Principles for Responsible Investment says signatories have $121 trillion of assets under management; even assuming lots of double-counting, that is most of the world’s managed money.
Over the next few weeks, Streetwise will explore the explosion of ESG investing and why I think it is mostly—but not completely—a waste of time. I will also offer up some solutions and discuss how to use your money to make a difference, while understanding the inevitable trade-offs.
ESG supporters can point to what look like successes: Their pressure has encouraged many companies to sell off dirty power plants, mines and, in the case of Anglo-Australian miner BHP, its oil business. It has even forced board changes at Exxon Mobil.
Sadly, selling off assets or shares by itself does nothing to save the planet, because someone else bought them. Just as much oil and coal is dug up and burned as before, under different ownership. And there are plenty of people out there to buy the assets, because never before in history has there been so much private capital operating without the public reporting requirements brought by stock markets.
Rich people who want to make the world greener could make a difference, by buying and closing dirty businesses even when they are profitable. So far, though, this hasn’t happened in any significant way. The pitch from Wall Street fund managers is the exact opposite—that by going green investors can change the world and make more money, not less.
“A lot of [clients] only really get enthusiastic if they get comfortable that they are not sacrificing return,” says Valentijn van Nieuwenhuijzen, chief investment officer at fund manager NN IP, which is being bought by Goldman Sachs.
Someone has to take a loss somewhere if fossil fuels are going to be left in the ground rather than extracted and sold. ESG investors’ hope is that the losses will fall on other people. The problem is that less environmentally-minded investors buying those shares, oil wells or power plants are absolutely not going to shut them down unless they stop being profitable.
It might make sense for an investor or company to sell out of fossil fuels early if they think the retreat from coal and oil is inevitable—indeed, that was the pitch by the activist who took on Exxon—but that is simply to invest according to a political prediction, not a way to fight climate change.
Some of the biggest sources of fossil fuels are immune to shareholder pressure anyway. Much of the world’s oil is pumped by government-controlled companies, led by Saudi Arabia and Russia. Exxon can be forced to change its approach, but the global supply of oil is still determined by OPEC, as President Biden’s appeal to the cartel to pump more to keep fuel prices down has demonstrated.
There are three big pro-ESG arguments, which sound reasonable, but have major flaws.
First, if companies treat the environment, workers, suppliers and customers better, it will be better for business. This could work where companies have missed something to boost profits, such as add solar panels on a sunny roof or create a better employee retention program. Early ESG activists plucked the low-hanging fruit here, but management has become painfully aware of changing customer and employee expectations, so there is less opportunity ahead.
Adding costs to reduce a company’s carbon footprint, or paying staff more, should only help the stock price if it also raises revenue or reduces other costs, by say generating more loyalty from carbon-conscious consumers, lowering staff turnover or improving relations with regulators.
Otherwise profits can only be maintained by passing the higher costs through into higher prices, and—unless the firm has monopoly power—eventually customers who don’t care will go elsewhere. The alternative is to reduce profits, but ESG investors are almost universally against this.
The second ESG point is that by shunning stocks or bonds of dirty companies, and embracing those of clean companies, it will direct capital away from bad things and toward good ones. After all, a lower stock price or higher borrowing cost in the bond market should make it less attractive for dirty companies to expand, and vice versa for clean companies.
In practice, there has been a very weak link between the cost of capital and overall corporate investment for at least a couple of decades. Small changes in the cost of capital pale in comparison to the risk and return projections of a new project.
That is not to say there is no link. Tesla, with extremely expensive shares, has repeatedly taken advantage of its ability to issue new stock to invest in factories and research. The high prices earlier this year for clean-energy stocks might encourage similar corporate investment. The flip side of course is that buying wildly overpriced shares isn’t a good way to make money, as losses of a third or more from this year’s peaks for clean-energy stocks shows. Shifting the cost of capital just might help save the planet, but after the short-term shift in valuations is over, it should lead to underperformance.
The third claim from some ESG investors is that they are just trying to make money, and that involves shunning firms that are taking unpriced risks with the environment, workers or customers. Since they call themselves “sustainable” or use “ESG integration,” funds doing this look very like the rest of the ESG industry. The selection principle of the most popular ESG indexes, for instance, those from MSCI, involves identifying only risks that are financially material.
I would say, sure. If you think the government is going to, say, raise fuel taxes, don’t buy manufacturers of gas-guzzlers. If you think the government will impose more restrictions on coal plants, then coal generation will be an even less attractive investment.
Equally, if you think customers will be willing to pay more for brands that cut their carbon use, by all means bet on their shares. Just don’t fool yourself that you are making much difference to the world with your investment decision. Red-blooded capitalists chase these profits just as much as any green-minded investor. There is no need to try to persuade capitalists to have a conscience; they will do what you want if you make it profitable via customer demands or government intervention (or, if we are lucky, new technology).
There is one way that ESG investing does, sort of, work. Shareholders can push companies to stop lobbying governments in favor of fossil fuels. Conceivably this might help push customers and governments to do the things that would really make a difference.
My big concern about ESG investing is that it distracts everyone from the work that really needs to be done. Rather than vainly try to direct the flow of money to the right causes, it is simpler and far more effective to tax or regulate the things we as a society agree are bad and subsidize the things we think are good. The wonder of capitalism is that the money will then flow by itself.
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