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Negative Effects of Society on Investor Psychology

Tuesday, April 5th, 2016

We have all seen the commercials from big firms portraying investing to be an easy day-to-day task. Whether it be the commercials about selling the right investment tools or being given the secret to predicting patterns and generating big returns, investors and their subconscious are consistently told they can make big returns in the market.

As we listen to these commercials over and over, our subconscious begins to develop the idea that maybe we can do this on our own, and we should give these tools a try.

These companies’ objective is to sell trades and get you to purchase their software. They are not concerned with you making money investing with them in the long run.

At Wilsey Asset Management, our motto is “investing can be simple, but it’s not easy.” We tell the average investor they can do their own investing if they do 5 simple things:

1. Read the quarterly conference call

2. Understand the quarterly financial statements

3. Understand the company’s 10-K/10-Q

4. Go over the numbers for your company on a weekly basis

5. Repeat these steps for every company in your portfolio.

If you are not willing to do the work, you will struggle with your investment decisions. For most people, it is not easy to fit the extra work into their schedule. They tend to fall behind on understanding where their companies stand.

Media, in general, can also be very confusing when it comes to investing information.

The other day I watched a panel on CNBC discussing whether Tesla was a good buy or not. One of the women on the panel quoted Warren Buffet in saying, “He buys what he knows,” and “If you close the stock market for 10 years, he wouldn’t care.”

She then came to the conclusion if you know and like Tesla, you should buy it for the future and hold it for the next 10 years.

By citing a credible source like Warren Buffet, she provides comfort to the average investor’s psychological thinking. People are lead to conclude that Warren Buffet is a well-known investor and if he made those comments, maybe Warren Buffet is buying Tesla.

The woman forgot to include one key piece of information in her thought process. Warren Buffet is a value investor; by no means is Tesla a value company at this time, so therefore, he would not be buying Tesla.

Society as a whole tends to adversely influence investors. Whether it be those commercials, the so called “experts” on T.V., or even our next-door neighbors, peer pressure influences people.

Psychological studies have demonstrated people will answer easy questions incorrectly when they have heard others give an incorrect answer. People are easily influenced by outside factors into thinking a stock is a great buy, before they do their homework to form their own conclusions about the stock.

One of the greatest mistakes the average investor makes is listening to others when they claim your strategy is wrong.

In general, people like to follow the herd. But if you are the last one to join the herd, you lose money because you are the last one to buy a stock before others started selling it.

The herd mentality can last many years and be successful for long periods of time. It is created in part, because investors fall victim to recency bias. This is a major contributor to the herd mentality.

They see companies such as Facebook and Amazon making huge profits for many investors in 2015, without truly understanding why those companies saw their values greatly appreciate. They then chase other companies they think will be the next Facebook or Amazon in 2016. This leads to investors losing money, and the big question, what happened?

During bull markets like we have seen over the last several years, it has been fairly easy to make money in the stock market. However, for people who do not have a disciplined approach when things go south, the herd mentality quickly fails investors.

If they do not know why they were successful when they made money investing, they are at risk to lose when the market falls.

Do you have a question or a company you would like us to take a look at?
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