2 cognitive errors that prevent you from making money on investments

To increase profits and minimize risks, investors must be guided by logic and act rationally. But in practice it is different.

Research showthat people often suffer losses because they choose the wrong time to make transactions. And this is not the fault of market instruments, but decisions that are made under the influence of emotions. Let's figure out why this happens.

What cognitive errors prevent successful investing

The influence of fear and greed

In order to find profitable offers and conclude deals, the investor must adhere to a rational approach and think logically. However, human behavior is strongly influenced by emotions - John Maynard Keynes wrote about this problem back in 1936 in his labor "The General Theory of Employment, Interest and Money".

Emotions make you deviate from the original plan and make impulsive actions, recklessly selling or buying paper. And the result of such transactions most often turns out to be negative.

Keynes was also the first to argue that, in particular, fear and greed lead to the formation of financial bubbles and subsequent sharp drops in stock prices.

Here's how it goes. When asset prices rise, investors become greedy: they are afraid to miss out on easy profits. As the demand for assets grows, so does the price. Sometimes it becomes significantly higher than any realistic estimates of the value of the business.

As a result, rising prices lead to the formation of a "bubble", that is, unreasonably high quotes with their subsequent sharp drop.

Similarly, when prices decrease, investors may sell at a loss for fear of losing all their capital. Or, for the same reason, they increase investments in unprofitable assets with the hope of rapid growth. Both of these strategies lead to losses in most cases.

Interestingly, not in all areas of the economy, investors are so affected by emotions. Let's take an example from real estate.

Would you buy an apartment for 20 million rubles if you knew that a couple of months ago, similar housing in this area cost 10 million? Or would you sell real estate when its price has halved?

The answer is obvious: you know the real value of the apartment and will not buy it significantly more or sell it for less than this value, unless you have other important reasons.

But in the stock market, "bubbles" form and burst all the time - just look at any chart of financial asset quotes over several decades.

High expectations

The invention and massive development of the Internet in the late 1990s led to the fact that in the early 2000s only the lazy did not invest in US technology companies.

The prospects for grandiose changes in the economy of this country were so bright, and their scale so colossal, that expected profits for companies in this sector were not predicted using traditional metrics, but were determined practically at random.

The Internet was supposed to help many existing businesses cut costs. And others will simply disappear, and newly created technological technologies will take their place. companies. Accordingly, the demand for the shares of the latter was colossal, and the supply was limited.

The index of firms whose shares were traded on the American NASDAQ stock exchange grew by 400% from 1995 to March 2000, as demand for the shares of these companies greatly exceeded supply.

Unrealistic expectations in analyst models, inflated company valuations, and an almost total lack of common sense on the part of investors were par for the course.

Investments in such stocks grew from month to month, until in March 2000 a sharp drop in quotations began. Index continued decline more than two years, having lost a total of about 80% of the previous growth, and reached the previous values ​​only after 15 years - by March 2015. Everyone who invested in technology companies between 1997 and 2000 lost all of their capital.

This is one of the most telling examples of how unrealistic expectations, disregard for common sense and greed lead to disaster. And this story is not the only one. Suffice it to recall the index of emerging markets stocks, which collapsed sharply in one day in 2004, or the financial crisis of 2007-2008, which began due to the issuance of high-risk mortgage loans in USA.

Investors they are not stupid at all - they just tend to avoid discomfort and seek pleasure. It's so easy to sell when everyone around you is scared, and buy when you are sure of a cloudless future. We are comfortable acting like the majority does, because "everyone can't be wrong." But this is often the wrong decision.

For years, a growing market creates the feeling that investing is easy. The illusion is born that it is not necessary to study the business of enterprises and make realistic estimates of its value and growth rates. In such cases, it is easy for investors to mistake luck for skill, which most often leads to a loss of capital as soon as the markets turn around.

Looking back, we almost always realize that we let our expectations go beyond reasonable limits. Although at that moment it was not at all so obvious. Therefore, you always need to clearly understand what and why you buy.

How to get rid of these cognitive errors

Correctly form an investment portfolio

Fear and greed are natural for a person, and it will not be possible to completely get rid of them. But it is possible to notice their influence on our decisions in time.

For most people suffering from losses outweigh joy from the profits received in the same amount. Therefore, investors often seek to avoid a drawdown: they increase investments in depreciating securities in order to recoup more quickly and become profitable. Such a strategy usually only exacerbates the situation.

It is much wiser to build your investment portfolio so that the discomfort of possible losses is reduced to a comfortable level.

To do this, you can increase the share of conservative instruments such as bonds and deposits. Turn in briefcase reliable papers - these can be government bonds with a maturity of 1-3 years. There is a low risk of bankruptcy, and the range of their revaluation is small.

Returns will be low compared to less conservative instruments such as stocks. But then you can sleep peacefully when the markets are in a fever, because the revaluation of your portfolio will be comfortable for you.

If you want more profitability, you should choose a more risky instrument - stocks. They reflect the value of the company's business and can bring the owner both significant profit and loss.

When the market rises, you will participate in the growth of quotes, and the value of the investment will increase rapidly. When the trend changes, you should be prepared for negative revaluation and a decrease in the value of your portfolio. Moreover, fluctuations in both directions can be serious and depend on the type of securities in which you invest.

The main thing is not to succumb to greed, buying shares at ever higher prices. Otherwise, it may turn out that you purchased a significant part of the securities closer to the local price peak - when quotes start to fall, your losses can be significant.

You can also reduce risk by diversifying your portfolio. In other words, you need to decompose the capital into different "baskets" with different levels of risk and in certain proportions.

For example, you can buy not only shares or bonds of one or two companies, but also precious metals, currency, real estate and other assets. If returns fall on some points, then returns will rise on others, and the chance of making a profit will be higher, and the overall risk of the portfolio will be lower.

In general, there is no right and wrong approach - it is important to find your own balance and collect such a portfolio that will allow you not to commit emotional acts, but to be guided by logic and common sense meaning.

Rely on analysis, history and facts

Is it worth investing in the stock market now? There is no universal answer: it will be different for each person. However, there are periods when you definitely need to be more careful - for example, after the rapid growth of quotations, many times higher than the average values ​​of annual returns.

It is important to soberly analyze the situation, correlate current trends with past experience, compare performance and assess the company's growth prospects based on its historical data.

At the same time, it is worth increasing the level of financial literacy. This will help you better understand the subject area and avoid investing in assets that are too risky for you.

A huge amount of information is now available on quotes, charts and technical indicators, industry reviews, interviews with analysts and podcasts with company representatives. Here are some helpful resources:

• Website of the National Association of Stock Market Participants (NAUFOR), section "financial literacy». Here are the resources that beginner investors should pay attention to.
• Website tradingview.com. Here you can see quotes of almost any asset that is traded on world exchanges.
• Psychologist and wealth manager Daniel Crosby's bookBehavioral Investing». In it, the author examines in detail a variety of external conditions that can influence our choice.

Becoming a professional investor is not easy, but understanding the basic principles of successful investments and protecting your capital from the influence of emotions is not so difficult. The main thing is to take the first steps in this direction.