Do not ignore data while making investment decisions

One must look at 2008 after the collapse of Lehman Brothers when stocks were plummeting month on month. Say a stock that was quoting at R500 in January 2008 went down to R300 in March 2008 and now has recovered at R1,100. So while anchoring is useful,it must be used judiciously when it comes to investing.

Now,as the market is witnessing a lot of volatility and has retreated from the 21,000 levels of November last year,many investors would think: How come I did not see the downside coming? But there are certain obvious macroeconomic factors like higher food inflation,rising interest rates,and the spate of corruption charges against the government. Investors must look at macro factors more closely and stick to the asset allocation process after understanding all the variables.

It is important that after an investor has made the decision either to buy or sell or hold,he should look for all information and data that supports the view.

I have come across instances where the investor has already made a decision and he is seeking opinion that supports his decision. Here,one is only hearing what one wants to hear. The objectivity of the investment is lost if this bias creeps in.

Outcome is more important than the process. As our memory is short,we tend to look at events that have happened in the recent past. When the markets are falling,equities are a bad place. But when the markets are rising,there is no other place other than equities to invest. And this is what drives greed,envy and overconfidence. When these become your vehicles,then the outcome (the maximum return) overrides the process,which is investment based on asset allocation,time horizon and risk profile.

If an investor buys and sells stock and gets information which is contrary to his original view,then he tends to ignore and distort the new information because this is in conflict with his original view. In such a case,one tends to rationalise one’s thoughts to remove the discomfort.

For an investor,maintaining the status quo can be counterproductive. If you have received stocks or property through inheritance and are not selling despite the fact that they have far outlived its valuation,then there is no value for the inherited assets. One does not take any action as it was passed on to you and you feel an emotional connect with the person who had passed on the inheritance.

Remember,the person who had passed on the inheritance wanted you to create wealth,too. And if he made an error of judgement,he doesn’t want you to continue. So,the next time you are confronted with choices,take a walk down the lane,make note of all your reactions and then make an informed decision.

* The writer is founder and managing partner,Zeus WealthWays