Step 1: Active Investors
known better, when in truth, news is what moves the markets, and past events could not have been predicted in advance. • Familiarity bias: Investors invest only in stocks they know, which provides a false sense of security. An example may be a “legacy” stock that’s been passed down in a family through generations. Geographical bias also comes into play when investors choose stocks of companies headquartered in their state or region of residence, which can lead to undiversified investments. • Regret avoidance: Investors vow to never repeat the same decision if it resulted in a previous loss or missed gain, not accepting that the future cannot be predicted. • Self attribution bias: Investors tend to take full credit for investment gains and blame outside factors for losses, wrongly attributing success to personal skill instead of luck. • Extrapolation: Investors base decisions on market movements, assuming the perceived trend will repeat. These behavioral biases cause investors to believe they have control in areas where they actually have little or none. A disciplined, rules-based investing approach involves the understanding of the factors we can and cannot control, planning ahead and not giving into emotions when making investment decisions. Figure 1-2 depicts the roller coaster of emotions active investors experience. In the emotional cycle, they wait until
This book reveals the potential land mines and pitfalls of active investing and educates readers on the benefits of passive investing with i...