If you're a lousy investor, don't blame it on your investment skills. The problem is your brain, says Joe Huber of Huber Capital Management.
The brain is designed to help humans survive, but the traits for general survival are not necessarily adequate for navigating the stock market. In fact, the brain's hard-wiring can be detrimental to an investor's portfolio, Huber told
USA Today.
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Like it or not, humans are prone to bias, including when they invest. As such, people are often described as either growth investors or value investors. And both camps are prone to costly timing mistakes, explained Huber.
In their search for bargains, value investors tend to buy too early and sell too early. Growth investors jump into stocks too late and hold them too long. So, while they make different mistakes, Huber says both types of investors leave their gains on the table.
He also says investors are prone to “distorted ROE reversion.” It may sound complicated, but it's a mental flaw that's actually quite simple to understand: People tend to make the mistake of believing the present represents the future.
If a stock is doing good now, people will invest without considering that the tide could turn. That same thinking prevents many investors from putting money into poorly performing assets that are set to rebound, notes Huber.
And while we all know everyone makes mistakes, it's often hard for investors to admit when that's the case.
When investors choose a losing stock, they tend to tell themselves “it will come back” and they buy more to help recoup the losses. Huber says that strategy is a dangerous one.
Investors are often better off cutting their losses and moving on, he says.
In the current environment, many people, especially young investors, give themselves too much credit, he adds. They don't realize that in a bull market everyone's portfolio tends to do well. They see their own gains and they think they are savvy investors. That overconfidence commonly leads people to take unwarranted risks that put their portfolios in jeopardy, says Huber.
Some may assume that wealth means investors are smarter and therefore immune to common mistakes, but that's far from true, notes an article in the
Pittsburgh Business Times.
A deVere Group survey of high-net-worth individuals found that rich people are prone to common investment errors including emotional decision-making and focusing too heavily on the history of an investment’s returns.
According to Huber, a key to avoiding investment mistakes is breaking away from traditional schools of thought.
For 80 years, people invested mainly on the premise of either fundamentals or technical analysis, he told
CNBC. But his firm's approach recognizes the importance of an additional key factor, the psychology of the stock market, which helps them avoid common “decision flaws.”
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