If there is one thing I want you to take away about developing the mindset of an investor, it’s that you are your life and you need to control what you can control. Let the investing happen in the background.
The best-performing company in the world does not care about you. It does not know you’re a shareholder, and you need to know that. Focus on what you can control, and let your investing do the rest.
Any companies come to mind with that statement? Nvidia perhaps? Perspective always matters and it’s fun to compare, so let’s take a look.
Nvidia’s market cap as at September 2024 is approx. US$2.6 trillion dollars. The total market cap of the ASX200 index is approximately US$1.5 trillion dollars.
Now that perspective can really make the mind boggle. While Nvidia has had genuine growth over the last five years, even the last 12 months – we are seeing the company pull back and some investors have been getting nervous.
The investors that are getting nervous may have been a victim of one or both of the behaviour traps, hype and confirmation bias.
These investors may have only joined the party in recent months. Hype does take time to build and generally, people will make the real money before this begins.
Am I surprised with the rise of Nvidia? Well, yes and no.
Yes, because these types of mega companies don’t appear every week and it’s been a fascinating story to see.
I also say no because if you look back at the turn of the century, you could replace the word Nvidia with Intel.
Intel was one of the darlings of the dot com bubble.
Plenty of people made lots of money, but plenty lost money.
Take a look at the long-term price chart of Intel for yourself.
The silver lining for Intel was that it was actually a company that produced something of value and is still around today.
A couple of points to consider when looking at Nvidia and your own investor behaviour:
Investing in single companies can exacerbate the swings of investor behaviour
If you stick to index investing, you would have exposure to Nvidia in any case, so that will remove any stress from your life or wondering if you have picked a winner
For every Nvidia there are thousands of companies that went nowhere
Most retail investors will buy shares at share price peaks (whenever they are) and lose money as they have no real strategy
This AI boom could be considered bubble territory like the dot com bubble
Greed leads to broke
Cathie Wood is still probably upset about her call on Nvidia
First and foremost within your control is your investing behaviour and ability to avoid the following two behavioural traps:
Hype
Parking Nvidia aside, the rise and fall of the value of Bitcoin (or any cryptocurrency) is strongly correlated with the amount of hype associated with the asset, either online or in real life.
The more people were talking about Bitcoin, the higher the price became. When a tipping point came and some of the hype wore off, fewer people were suddenly wanting to buy Bitcoin. With fewer people wanting to buy and the same supply in the market, the price fell.
We have seen these cycles come and go over the years with Bitcoin. The reason it’s a good illustration of hype is that it has arguably no intrinsic value. It’s worth what someone is prepared to pay for it.
Hype and FOMO can make us do dumb things.
With behavioural finance, this is what’s known as ‘herding’ or a herding bias or mentality – meaning people follow what others are doing without thinking about their own situation and analysis or conducting their own due diligence. I believe herding when investing comes from either or all of the following:
Being lazy and thinking because others are doing it, it must be okay.
A deep sense of FOMO on massive returns.
Not having your own strategy in place and sticking to it.
It’s funny that people will not ‘herd’ to a broad-based index of the top 200 companies in Australia.
It only really occurs when there is the chance to strike gold and make lots of money fast.
For every cryptocurrency or unicorn company that has gone to the moon, there are thousands of investments that have had hype and investors ended up without a cent.
Just think, if you did put $500 into Bitcoin and it went to the moon and you gained 300 per cent in two months, you’d end up with an extra $1,500. While this is nice and you’d take it, it won’t change your life. You’ve had a dopamine hit. For it to really change your life, you’d want to have put all of your money in it, and that’s just not wise at all.
To protect yourself against herding behaviour:
know that if everyone is talking about it, it’s probably too late to invest in it successfully.
be confident that your strategy works for you and that it’s a long-term play.
try to remove yourself from manually investing month-on-month – use automation instead.
understand some big wins on small amounts will not change your life.
know that it’s real and irrational.
I used Bitcoin as an example, but the truth is it can happen with listed companies too. When the dot-com bubble was expanding, people were buying shares in companies that had no value, no income and no real plan. The values just kept increasing because the demand was increasing. Some of these businesses succeeded, some did not. Some investors lucked out.
Don’t be fooled into thinking because this was a quarter of a century ago that it won’t happen again. Time changes but human nature does not.
Confirmation bias
When someone asks you which dentist they should go to (or about any other service), you say, "You gotta see Lacey! She is the best dentist ever! OMG!"
The thing is, you’ve had a good experience with her, she has looked after you and is reasonably priced.
Does that mean she is actually the best dentist? No.
How can you know with certainty? You only think she is the best because you have a bias towards this particular dentist because of your familiarity and your own positive experience.
The same can happen with investing.
For example, you bank with a big four bank and you figure you may as well own some of its shares because it has been a good bank for you.
Or you shop at a large supermarket and figure you should buy shares in it because you’re a loyal customer and you shop there.
The thing is, you can’t base your investing decisions and strategy on feelings or irrational biases. These need to be separate – always.
What if the bank you use has the best app and you love using it, but the bank you have chosen to invest in has been a dog for many years and if only you’d chosen another bank, you would have gotten a higher return.
What about the fact that all you have heard about over the last couple of years is how Nvidia is so strong and it just keeps growing… does that impact your decision making?
How do I remove confirmation bias? I do this by only investing in broad-based indexes. I also understand that I can’t possibly know everything, and I’m okay with that.
Edited extract from The quick start guide to investing: Learn how to invest simpler, smarter & sooner by Glen James & Nick Bradley (Wiley $32.95), available at all leading retailers.
James is host of the money money money podcast (formerly my millennial money) and author of the Quick-Start Guide to Investing.
