Financial Times: How to control yourself in investment? Avoid falling into the trap of "over-trading"

The Financial Times said that there is a lot of evidence that people are disturbed by seemingly trivial and completely irrelevant factors when making decisions. Nobel Prize winner Kahneman called them: noise.

The author of the article, Wu Zhijian (CEO of Singapore Wufu Capital), pointed out that in the real world, as long as people make decisions, they will be affected by "noise". People who need to make decisions in the field of financial investment are no exception.

In his article, he cited a statistical study of 200 financial advisors (Davies, 2021), which showed that for the same investor client, these financial advisors made very different risk assessments. At the same time, the stock allocation ratios they recommended for the same client included various numbers ranging from 0% to 100%.

Based on this research, Wu Zhijian concluded that in addition to financial advisors, we, the vast majority of investors, often make various contradictory and irrational decisions in our daily investment activities, which ultimately leads to a drag on our investment returns.

Statistical results from Statmen in 2010 showed that the more frequently retail investors in the US stock market trade, the worse their investment returns. The investment returns of retail investors who trade most frequently are about 7% lower than the index returns of the same period.

The study shows that the more individual decisions you make, the more susceptible you are to noise and therefore the more likely you are to make mistakes, leading to worse returns for yourself.

Wu Zhijian asked in his article: Why do individual investors fall into the trap of "over-trading" so easily? He summarized the following reasons:

First, investors are susceptible to the "illusion of control". If you buy an index fund or stock and then hold it for a long time without doing anything, it is easy for people to have the illusion that their investment is not under their control. However, the future of the market is unclear, and no one knows whether the market will rise or fall next.

Secondly, it is difficult for most investors to accept the word "mediocre". Few investors are willing to admit that their investment ability is below average, so they prove their excellence by picking stocks, funds or timing.

Thirdly, investors often underestimate the element of luck in investment. Short-term investment results often carry a large random factor. If an individual investor believes that he has strong investment ability, he will be accustomed to using scattered evidence to further strengthen his belief, while ignoring evidence that is unfavorable to him. Wu Zhijian believes that over time, even if the investor's actual performance is very poor, he may have the illusion that he is a "civilian Buffett" and indulge in excessive trading.

At the end of the article, Wu Zhijian concluded that whether experts or laymen, when making various decisions, they may be affected by external noise and irrational behavior habits, which may lead us to make inconsistent decisions. In many cases, the biggest enemy in investment is ourselves. Investment is a marathon, not a 100-meter race. The final victory must belong to those highly self-disciplined long-term investors.