Many years ago, I was travelling with a friend and his family to a holiday in Skegness as his Father gave him ’interview prep’ for an upcoming interview for a job at McDonald’s. My friend’s Father asked my friend whether or not his would ever act in a biased way against people and my friend immediately responded \”Of course not, I am absolutely fair in everything I do\”.
\”Actually,\” said his Father, \”you’re not. We’re all biased in one way or another. A more accurate and truthful response would be that you are biased, because we all are, but that try not to discriminate against others because of it.\”.
I’m sure that a few of us have a version of that story but the lesson is one that has stuck with me for many, many years and one which I have valued ever since.
If we are all biased due to our experiences, knowledge and preferences, then every article, comment and conversation you have will also have a corresponding bias. As such, the only thing you really rely on when it comes to making decisions is your own opinion, and should therefore work to make this as informed and logical as possible. Just because someone else says something, no matter how experienced or certain they seem, it doesn’t mean that they are automatically correct.
I express opinions all the time – we all do. Basic preferences, ’senses’ and other ephemeral ’feelings’ that aren’t really grounded in fact and logic (even if we state them like they are). This is the core of the issue when it comes to investing. I’ve lost track of the number of start-ups that contacted me through 2019 with a ’guaranteed, market-leading idea’ and a flashy slide pack demonstrating their expertise and potential.
To be a successful investor however, I have to be able to ignore, bat away and tune out these scrabbling hordes of ’opportunities’ in favour of factual, logic-based potential. Facts are objective – they do not lie and do not change. If a company has never made a profit in five years of trading then no amount of ’promises’ that it next year will be different will change that. Facts can be verified and proven. Opinions are based on little more than an assertion (although some opinions can be factual, one should not assume that they always are!).
Indeed, a large portion of this blog is opinion based (although also independently verifiable – I’m not in the habit of hoodwinking my readers!). It is also biased.
It is biased by the experiences I have had – many of which are entirely unique to me – over the many years I have been investing. This doesn’t mean that I’m spouting opinions left, right and centre with no thought or consideration to logic and reason, but simply an acknowledgement that everything I write is undoubtedly influenced by my experiences.
In a similar way, both I, and other investors have guard against the subconscious bias inherent in investing. Once you have made a decision – buy or sell – the tendency is to never reconsider it. After all, we don’t like to be wrong and so we ’anchor’ our decisions on earlier information. For example, if I take a decision to buy National Grid at £10 a share, and it falls to £8 a share, I might feel that this represents a great opportunity to buy more. Likewise, if the share price rises to £12 a share, I might think it’s now ’expensive’ and avoid buying more as I’m ’anchored’ to me original price. Neither of these is necessarily true but my ’anchor belief’ is firstly that National Grid is a company worth owning and secondly that it is worth no more and no less than £10 a share.
Examples of bias include;
Company Trading Statements
Most companies actively seek to present information in a manner that is supportive to their share price and public image. In the worst cases, this results in fraudulent and misleading statements, but most of the time it’s simply a natural by-product of a company’s PR and Marketing team doing their jobs. Some company directors may hold significant shareholdings in the firm and as such will actively seek to accentuate the positives and minimise the negatives.
Accounting Statements
In a similar manner to trading statements, accounting updates can often be extensively manipulated to make things look far better than they actually are. An obvious example would be a company ’selling’ products on credit and booking it as revenue. They have no actual cash in the bank, simply a huge stack of ’IOUs’ from customers, but to a casual observer appear to be selling lots and generating significant revenues.
Analyst and Broker Recommendations
I use the title ’analyst’ under advisement here and include magazine, newspaper and online ’tipsters’. All parties have a vested interested in selling coverage – magazines want more readers, tipsters want more followers (or opportunities to offload shares to unwitting amateurs), and brokers face a conflict of interest from penning coverage of the same firms that pay their fees.
Bulletin Board Commentary
All bulletin board users are biased by virtue of owning (or considering buying) the shares they are reading and writing about. In the industry, this is known as ’talking your book’ where you set out your rationale for a buy or sell decision and ignore all other positions and evidence. You can still find some useful ideas on bulletin boards, but use them carefully!
How to respond to bias
This isn’t a complete list but hopefully it gives you a few ideas about the bias of information you’re consuming on a daily basis. Always consider what you’re reading or heading and question it. Consider whether the source is reliable and what their motivation could be.
Build a reliable source of information over time and constantly review it for accuracy, relevance and reliability. My previous blog on sources of information may be some help here. Don’t look for too much information either – popular stocks may have dozens of articles a week written about them, but the facts will not change, no matter how many opinions you read about them.
Don’t listen to one side of an argument and ignore the other. Every situation has two sides to it. Just because you have a conviction doesn’t make you a master of the future so consider all the things you may have missed or misinterpreted. This extends to ’group think’ where you only listen to opinions and arguments that reinforce your own point of view. It’s comforting to be told you’re right, but none of us are all the time. The sooner you can accept and live with this fact., the less likely you are to invest in hidden disasters!