BREAKING BARRIERS

Practicing bias-free decision making is essential for investors to avoid the mental traps of biases and achieve success in the stock market

The rally in the stock market has produced many new stock pickers. However, many of these investors suffer from a bias: they judge the success or failure of a stock based on its price, which is an incorrect measure of its performance. Investors should avoid this mental trap to protect their wealth.

Many investors judge the quality of their investment decisions based solely on the short-term movements of stock prices. They see rising prices as a validation of their choices and seek confirmation from others.

THE CRUX OF THE ISSUE

The adage ‘a rising tide lifts all boats’ holds true in the stock market, where sustained upward trends, buoyed by liquidity and sentiment, can transform every stock into a potential multi-bagger.

Consequently, identifying the next multi-bagger appears easy and gains widespread popularity. This phenomenon raises the likelihood of any investor, regardless of their knowledge, skills, temperament, or experience, assuming the role of a successful stock picker.

However, this winning streak often breeds excessive confidence, which may ultimately prove to be a mere illusion or, as Nassim Nicholas Taleb aptly described, falling victim to the hidden role of chance in life and the markets.

There are several reasons as to why judging the success or failure based on its stock price is an incorrect measure of a stock‘s performance. First, the stock market is an extremely volatile place, and prices are likely to fluctuate wildly. This means that even a good investment’s price can go down in the short term.

Second, stock prices are not always a reflection of a company’s underlying fundamentals. For example, a stock price can go up even if a company is losing money.