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Does Behavior or Skills Matters More in Investing?


sunsetatkeppel According to this article from New York Times, Your Investing Behavior Costs You Plenty, by Carl Richards, it is behavior that matters more.

When you think about it, it actually makes sense. At first, I was going, come on, are you serious? What about the Warren Buffetts and Peter Lynches of the world?

The article argues that ordinary real people like you and me are chasing performance  by looking at things with the benefit of hindsight. So what happens is that the average investors will do worse than the returns from an average investment.

So he is talking about churning your investments for no rhyme or reason other than there are shares or products that did better than yours.

Thus a research by Morningstar found that there is a 10 percent difference in the returns of an average investor  from the annualised returns of a Greater China Fund.

Does that mean that you should leave your stocks alone once you bought it and not touch them? Nope, if you have to sell it, it has to be at least two from this list:

    1. the stock fundamentals have changed for the worse- ie from a growth company which you bought it for to a declining company
    2. you have found another company which you have analyzed and found it with better prospects than the company you want to sell (and not because the share prices of the company you found have risen in the past two weeks)
    3. you found that the story you bought the stock for does not fit what you find out about the company later. ie it is one big mistake!
    4. the stock p/e has jumped so far off the scale it is wildly overvalued
    5. you need the money from the sale urgently

From studying and reading about investors, you find out that it is actually their methodology that enables them to be so good in their investment returns.

So one could say the behaviour/methodology  means that they become more skilled over time through set backs and winners in their portfolios.

What do you think?

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Musicwhiz said...
February 4, 2010 at 7:43 AM  

Hi Lemizeraq,

Behaviour augments analytical skills. You need BOTH to be good at investing. Having one without the other will not cause one to succeed. This is what I've discovered after a number of years investing in the stock market.


Welfred said...
February 17, 2010 at 10:18 AM  

It is part of having the both of it if you need to succeed in investing. i totally agree of Lemizeraq.

I think when you invest you need to make it sure that there's some profit in return.

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