Be Careful With What You Wish For
July 27, 2024
There are several examples of how a financial gain will end up costing you money, writes Peter Watson.
This is a story about how some people invest.
Some investors are confident in their ability to choose specific stocks. There may be many reasons for that confidence.
Assume the investor used their natural ability to select a stock to invest in and three months later the value had doubled. You now have a confident investor.
The same investor did the same thing with another stock and had the same successful result. The investor confidence increased.
And finally, a third stock was purchased that resulted in a doubling of money. What you now have is a very confident investor. Perhaps too confident.
Confident investors tend to want to use their skills for financial gain. They keep choosing stocks and are more likely to invest more money each time because of their newfound confidence.
The fourth transaction resulted in a loss which was disappointing but did not dent the high degree of confidence. The fifth transaction was also a failure but that would be rationalized as being unlucky because the confidence in the ability to successfully pick winning stocks is strong.
If someone tossed a coin and consistently correctly predicted “heads” there is little chance they would think they were gifted at tossing a coin. They just were fortunate; some may call it lucky.
Had our investor had disappointing results from the start of their investing experience, they might be more inclined to abandon stock picking for a more prudent approach and employing strong diversification.
If you are a stock picker you hope to pick winners. Be careful with what you wish for, those winners might boost your confidence and that often leads to disappointing results.
Peter Watson, of Watson Investments MBA, CFP®, R.F.P., CIM®, FCSI offers a weekly financial planning column, Dollars & Sense. He can be contacted through www.watsoninvestments.com
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