The investor against himself
Our brains weren’t designed for investing
Have you ever looked at a share chart that had fallen by 20 per cent and caught yourself thinking, ‘I need to do something straight away!’? Or, conversely, watched yet another company’s share price rise by 300 per cent and thought, ‘Why on earth didn’t I buy it sooner?’
The human brain is a special superpower and, at the same time, a huge hindrance. It is precisely thanks to it that our species has managed to survive. And millions of years of evolution have prepared us for a completely different world. Our ancestors had to be able to recognise any threat and act instantly. This mechanism helped humans survive for centuries.
The modern stock market operates by its own rules - rules that run counter to these instincts.
Have you ever looked at a share chart that had fallen by 20 per cent and caught yourself thinking, ‘I need to do something straight away!’? Or, conversely, watched yet another company’s share price rise by 300 per cent and thought, ‘Why on earth didn’t I buy it sooner?’
The human brain is a special superpower and, at the same time, a huge hindrance. It is precisely thanks to it that our species has managed to survive. And millions of years of evolution have prepared us for a completely different world. Our ancestors had to be able to recognise any threat and act instantly. This mechanism helped humans survive for centuries.
The modern stock market operates by its own rules - rules that run counter to these instincts.
When the value of a portfolio falls by 20 per cent, our brain perceives this almost as a physical threat. The limbic system kicks in - the ancient part of the brain responsible for the ‘fight-or-flight’ response. It does not analyse the likelihood of the market recovering in five years’ time. Its task is to stop the pain immediately.
That is why the average investor so often sells shares precisely when they need to stay calm. Not because they are not clever or experienced enough. But because millions of years of evolution have proved stronger than a few books on investing.
This tendency is exacerbated by another well-studied effect - loss aversion. Losing a thousand dollars feels roughly twice as painful as the pleasure of earning a thousand. Rationally, this makes no sense, but the human psyche works precisely this way.
What conclusion can we draw from this? When investing, it is important to understand that, whenever there are problems or market downturns, you should expect this natural reaction and refrain from making any decisions at that moment. Most investors’ mistakes arise not whilst analysing financial statements, but at the moment a decision is made. Fear causes people to sell too early, whilst greed causes them to buy too late.
We don’t buy the best assets. We buy the ones everyone’s talking about.
If fear makes us sell too late, greed does the opposite - it makes us buy at too high a price.
Every generation goes through its own version of the same story. The dot-com companies of the late 1990s, Bitcoin, GameStop, NFTs. Each time, it seems as though things are different. People buy not because they have carefully analysed the value of the business, but because someone else has already made a profit. The market rarely rewards latecomers. Yet it is precisely the latecomers who most often create the hype.
All of this is FOMO - the fear of missing out - when investing gradually turns into a race to snap up the fastest-growing asset.
The problem is that most such stories are no longer about investment, but speculation. And the difference between an investment and a gamble is crucial. An investment involves understanding the business, valuation and a long-term horizon. A gamble is the hope that someone else will buy it for more. And indeed, some people do buy for one dollar and sell for a hundred. But thousands of others jump in much later, when the growth has practically come to an end.
For such investors, Eifos Hub offers a compromise: if the urge to speculate is too strong, set aside a separate account for this purpose – 3–5 per cent of your total investments – without affecting your long-term portfolio.
That is why the average investor so often sells shares precisely when they need to stay calm. Not because they are not clever or experienced enough. But because millions of years of evolution have proved stronger than a few books on investing.
This tendency is exacerbated by another well-studied effect - loss aversion. Losing a thousand dollars feels roughly twice as painful as the pleasure of earning a thousand. Rationally, this makes no sense, but the human psyche works precisely this way.
What conclusion can we draw from this? When investing, it is important to understand that, whenever there are problems or market downturns, you should expect this natural reaction and refrain from making any decisions at that moment. Most investors’ mistakes arise not whilst analysing financial statements, but at the moment a decision is made. Fear causes people to sell too early, whilst greed causes them to buy too late.
We don’t buy the best assets. We buy the ones everyone’s talking about.
If fear makes us sell too late, greed does the opposite - it makes us buy at too high a price.
Every generation goes through its own version of the same story. The dot-com companies of the late 1990s, Bitcoin, GameStop, NFTs. Each time, it seems as though things are different. People buy not because they have carefully analysed the value of the business, but because someone else has already made a profit. The market rarely rewards latecomers. Yet it is precisely the latecomers who most often create the hype.
All of this is FOMO - the fear of missing out - when investing gradually turns into a race to snap up the fastest-growing asset.
The problem is that most such stories are no longer about investment, but speculation. And the difference between an investment and a gamble is crucial. An investment involves understanding the business, valuation and a long-term horizon. A gamble is the hope that someone else will buy it for more. And indeed, some people do buy for one dollar and sell for a hundred. But thousands of others jump in much later, when the growth has practically come to an end.
For such investors, Eifos Hub offers a compromise: if the urge to speculate is too strong, set aside a separate account for this purpose – 3–5 per cent of your total investments – without affecting your long-term portfolio.
Over the past 50 years, we have learnt more about the stock market than in all of history prior to that. We have come to understand how stock market mechanisms work. We have seen, time and again, how share prices can plummet in a matter of hours. We have weathered more than one crisis. We have experienced inflation first-hand and learnt to diversify our risks.
An entire industry has sprung up around investing. Consultancy firms offer their assistance, traders are ready to work round the clock, analysts publish forecasts daily, and there are enough books and studies on how to invest properly to last several lifetimes.
And yet, the majority of investors continue to underperform the market. Why?
At first glance, the answer seems obvious. The wrong shares, the wrong advice, the wrong time to buy, a trend spotted too late, or yet another economic crisis. But the more deeply you study investor behaviour, the more you realise that the problem lies not with the market at all.
The only variable that economists have still been unable to ‘fix’ is investor behaviour. A great deal of stock market research has been devoted to this issue. It’s a question that has also caught our attention here at Eifos Hub. And we’ve decided to get to the bottom of it.
An entire industry has sprung up around investing. Consultancy firms offer their assistance, traders are ready to work round the clock, analysts publish forecasts daily, and there are enough books and studies on how to invest properly to last several lifetimes.
And yet, the majority of investors continue to underperform the market. Why?
At first glance, the answer seems obvious. The wrong shares, the wrong advice, the wrong time to buy, a trend spotted too late, or yet another economic crisis. But the more deeply you study investor behaviour, the more you realise that the problem lies not with the market at all.
The only variable that economists have still been unable to ‘fix’ is investor behaviour. A great deal of stock market research has been devoted to this issue. It’s a question that has also caught our attention here at Eifos Hub. And we’ve decided to get to the bottom of it.
The most costly mistakes are born not in the market, but in the mind
Most psychological traps work in the same way.
After buying shares and seeing them fall, an investor begins to wait for the moment when the price returns to its previous level. The brain latches onto the first significant figure - the purchase price - turns it into a reference point and compares all subsequent offers against it. But this is an irrational approach. In such a situation, you need to ask yourself: ‘Would I buy this asset today at the current price if I had spare cash?’ If the answer is no, the purchase price is irrelevant - the asset should be sold regardless of whether it is in profit or at a loss. The past figure is an anchor, not an argument.
A psychological trigger such as confirmation bias works in exactly the same way. It is human nature to seek an explanation - and, often, a justification - for a decision that has already been made. Having invested money in a particular asset, an investor unconsciously filters out anything that contradicts the choice they have already made. In practice, it is more useful to do the opposite: to try to refute one’s own idea. To think through in advance what might go wrong. To find out what arguments are put forward by those who are opposed to it.
Added to these mistakes is another: the herd instinct. For millions of years, belonging to a group increased one’s chances of survival. That is why, today, going against the majority is psychologically extremely difficult. But this is precisely what a successful investor must do. Buying low means buying when others are selling in a panic. It is easy to say this, but incredibly difficult to put into practice.
Understanding and being aware of the mechanisms behind human psychological traps can help when it comes to overcoming them. However, very few people are capable of doing so.
It is not those who are smarter than the market who succeed
Most investors lose money because of their constant attempts to predict the market, buy at the right time, sell quickly, and find the next ‘star’ stock. But every new decision either creates an opportunity or, conversely, leads to failure.
Research shows that only around 2 per cent of company shares account for the market’s main long-term returns. And the problem isn’t that it’s impossible to beat the market, but that every attempt increases the likelihood of making a mistake.
That is precisely why the best investment decisions often seem the most boring: index funds, diversification, regular purchases and low fees. Their aim is not to outsmart the market, but to prevent investors from harming themselves.
Why the news rarely makes us richer
The final source of error lies outside ourselves.
Unfortunately, the media rarely help investors to make money or take better decisions. Their job is to hold the audience’s attention and get paid for it. The stronger the emotion, the more likely a person is to open an article, watch a video or share a post.
‘The market rose by 500 points’ – but which index exactly? ‘The company has made 10,000 staff redundant’ – but how many people were employed there before?
Clickbait headlines with bold claims and big numbers make an impression. But without context, they mean little. Social media only exacerbates this problem.
Passive investing
‘We have to be honest with ourselves. We don’t know which shares, which commodities, which sectors, which countries or which asset classes will perform best this year. And when we look back at the history of expert forecasts, it turns out that experts are no better than any of us.’ Barry Ritholtz
Investing is sometimes referred to as a ‘loser’s game’. It is not the person who makes the most correct decisions who wins, but the one who makes the fewest wrong ones.
That is why Eifos Hub’s advisers draw their clients’ attention to the concept of passive investing. First and foremost, because it systematically removes from the decision-making process the choices where investors most often go wrong.
A diversified portfolio eliminates the need to guess which shares will be the winners in 10 or 20 years’ time. Low fees prevent you from quietly losing part of your returns year after year. Regularly buying assets for a fixed amount removes emotion and market timing from the process.
Passive investing isn’t an admission that the market is smarter than you. It’s an acknowledgement that, in the long term, your toughest opponent is likely to be yourself.
Once the decision is made, the system takes over – not your mood.
Most psychological traps work in the same way.
After buying shares and seeing them fall, an investor begins to wait for the moment when the price returns to its previous level. The brain latches onto the first significant figure - the purchase price - turns it into a reference point and compares all subsequent offers against it. But this is an irrational approach. In such a situation, you need to ask yourself: ‘Would I buy this asset today at the current price if I had spare cash?’ If the answer is no, the purchase price is irrelevant - the asset should be sold regardless of whether it is in profit or at a loss. The past figure is an anchor, not an argument.
A psychological trigger such as confirmation bias works in exactly the same way. It is human nature to seek an explanation - and, often, a justification - for a decision that has already been made. Having invested money in a particular asset, an investor unconsciously filters out anything that contradicts the choice they have already made. In practice, it is more useful to do the opposite: to try to refute one’s own idea. To think through in advance what might go wrong. To find out what arguments are put forward by those who are opposed to it.
Added to these mistakes is another: the herd instinct. For millions of years, belonging to a group increased one’s chances of survival. That is why, today, going against the majority is psychologically extremely difficult. But this is precisely what a successful investor must do. Buying low means buying when others are selling in a panic. It is easy to say this, but incredibly difficult to put into practice.
Understanding and being aware of the mechanisms behind human psychological traps can help when it comes to overcoming them. However, very few people are capable of doing so.
It is not those who are smarter than the market who succeed
Most investors lose money because of their constant attempts to predict the market, buy at the right time, sell quickly, and find the next ‘star’ stock. But every new decision either creates an opportunity or, conversely, leads to failure.
Research shows that only around 2 per cent of company shares account for the market’s main long-term returns. And the problem isn’t that it’s impossible to beat the market, but that every attempt increases the likelihood of making a mistake.
That is precisely why the best investment decisions often seem the most boring: index funds, diversification, regular purchases and low fees. Their aim is not to outsmart the market, but to prevent investors from harming themselves.
Why the news rarely makes us richer
The final source of error lies outside ourselves.
Unfortunately, the media rarely help investors to make money or take better decisions. Their job is to hold the audience’s attention and get paid for it. The stronger the emotion, the more likely a person is to open an article, watch a video or share a post.
‘The market rose by 500 points’ – but which index exactly? ‘The company has made 10,000 staff redundant’ – but how many people were employed there before?
Clickbait headlines with bold claims and big numbers make an impression. But without context, they mean little. Social media only exacerbates this problem.
Passive investing
‘We have to be honest with ourselves. We don’t know which shares, which commodities, which sectors, which countries or which asset classes will perform best this year. And when we look back at the history of expert forecasts, it turns out that experts are no better than any of us.’ Barry Ritholtz
Investing is sometimes referred to as a ‘loser’s game’. It is not the person who makes the most correct decisions who wins, but the one who makes the fewest wrong ones.
That is why Eifos Hub’s advisers draw their clients’ attention to the concept of passive investing. First and foremost, because it systematically removes from the decision-making process the choices where investors most often go wrong.
A diversified portfolio eliminates the need to guess which shares will be the winners in 10 or 20 years’ time. Low fees prevent you from quietly losing part of your returns year after year. Regularly buying assets for a fixed amount removes emotion and market timing from the process.
Passive investing isn’t an admission that the market is smarter than you. It’s an acknowledgement that, in the long term, your toughest opponent is likely to be yourself.
Once the decision is made, the system takes over – not your mood.
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