Learn to invest with Buffett

Chapter 86

Chapter 14 Section 6 Overconfidence can only lead to excessive losses

When it comes to investing, I'd rather be self-controlled than overconfident.

--Warren Buffett
Confidence itself is never a bad thing, but when it's overdone, it can have a detrimental effect.Buffett has always been a confident person, but he doesn't think he's ever overconfident.He once said of how he felt in high school: "I wasn't the most popular guy in my class, but I wasn't the most annoying guy either. I wasn't one of a kind."

Overconfidence can be said to be more harmful than beneficial to investors.Investment psychology believes that investors' mistakes usually occur when they are overconfident.If you ask a group of drivers whether they think their driving skills are better than others, I believe that most of them will say that they are the best, which leaves the question of who is the worst driver.Similarly, in the field of medicine, doctors believe that they can cure patients with 90% certainty, but the reality shows that the success rate is only 50%.In fact, self-confidence itself is not a bad thing, but overconfidence is another matter.Overconfidence can be especially damaging when investors are dealing with their personal finances.

Investors are generally very confident, thinking that they are smarter than others, that they can pick stocks that can make money, can produce golden eggs, and can choose stocks that will be profitable in the future; Smart money managers, these managers outperform the market.They have a tendency to overestimate their skills and knowledge.They only think about the information that is readily available around them, instead of collecting deeper and more subtle information that is rarely obtained or difficult to obtain; they are keen on market gossip, and these gossip often lure them to step into the market with confidence. stock market.In addition, they tend to evaluate information that is available to everyone, rather than discovering information that few people know.

It is precisely because of overconfidence that many money managers have made wrong decisions.They are overconfident in the information they gather and always think they are more correct than they are.If everyone in the stock market thinks their information is correct, and they know something that others don't, a lot of trading will result.

It is precisely because of overconfidence that many investors make mistakes.They gain confidence from the so-called market information, and then believe that their judgment will not be wrong.If all investors in the stock market think that the information they have received is correct, and that they know a lot of information that other investors do not know, the result will inevitably lead to a large number of impulsive short-term transactions.This is a major cause of volatility or large swings in the stock market.

It is precisely because of self-confidence that investors should buy and hold stocks for a long time in a big bull market, but in actual operation, too many investors are doing short-term trading, and it can even be said that this kind of short-term market has reached the point of rampant .Even in the investment funds that were the first to open up the value investment trend, short-term market operations are very common.Most investors think that they have good information channels and the quantity and quality of information. It seems that they use the technique of "sell high and buy low" to make hype, and their performance must surpass others.

How does overconfidence affect investor decision-making?
1. Overconfidence will lead investors to overestimate the accuracy of information and their own ability to analyze information.Investors' opinions are derived from their level of confidence in the accuracy of the information they receive and their ability to analyze it.

2. Overconfident investors trade frequently.Their overconfidence can make them very sure of their point of view, which increases the amount they trade.But is frequent transactions or a high turnover rate detrimental to investment returns?If an investor has accurate information and has the ability to interpret it, his frequent trading will generate higher investment returns.In fact, due to transaction costs, this return would have to be high enough for it to outperform a simple buy-and-hold strategy.Otherwise, if the investor is not superhuman but just overconfident, the result of frequent trading will not yield high returns beyond the buy-and-hold strategy and transaction costs.

3. Overconfident investors trust their own judgment of a stock's value more strongly than they care about what others think.

4. Overconfidence will also affect the risk-taking behavior of investors.A rational investor minimizes risk while maximizing return.However, overconfident investors can misjudge the level of risk they are taking.Think about it, if an investor is convinced that the stocks he chooses will have a high rate of return, how will he be aware of the risks?
In short, overconfident investors always think that their investment behavior is very low risk, which is not the case.Overconfidence in the stock market will only lead to excessive losses.

Investment motto:

The investment portfolio of overconfident investors will have higher risk. There are two reasons for this: first, they tend to buy high-risk stocks, and high-risk stocks are mainly those of small companies and newly listed companies. stocks; another factor is that they have not sufficiently diversified their investments.

(End of this chapter)