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Investment mistakes can cost you $100,000s.

But 90% of these mistakes can be avoided with the right mindset.

Here are 10 psychological biases every investor must avoid: (and how to overcome them)

But first, a word from this week's sponsor.

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Now back to our newsletter 🤝

10 psychological biases every investor must avoid:

1. Confirmation bias

This is when you favor information that confirms your beliefs.

This bias reinforces your investment decisions and makes it easy to ignore:

- Market bubbles

- Poor fundamentals

- Missed opportunities

Overcome this bias by seeking opposing information.

If you’re bullish, look for bearish content.

If you’re bearish, look for bullish content.

2. Recency Bias

This is when you think recent events will repeat.

You see this often with bull markets and bear markets.

It’s why people feel like stocks will go up or down forever.

Recency bias makes people believe corrections will become bear markets and rallies will become bull markets.

You can avoid this by having an investment strategy you stick to religiously.

3. Herd Mentality

When you chase what’s popular, or rely on someone else’s research.

Hot stocks are hot for a reason…

It’s how you get burned.

And just because someone else did the research doesn’t make it good research.

This is how bubbles are created.

It’s also how they burst.

Avoid investing with a herd mentality by doing your research and relying on it.

4. Loss aversion

The pain of loss is greater than the pleasure of gain.

Losing $100 hurts more than earning $100.

So naturally, we try to avoid losses.

This makes investors hold on to losing positions because they “just want to break even.”

But they never do.

Avoid loss aversion by cutting losses when:

- You need to rebalance

- Fundamentals deteriorate

- You found another opportunity

5. Hindsight bias

Hindsight bias convinces you an event was easily predictable after it happened.

This is why everyone says they predicted this bear market.

Everyone’s a genius when hindsight is 20/20.

Overcome hindsight bias by documenting your decisions to remind yourself of why you did what you did.

If your decision was justified at the time you didn’t make a mistake.

You stuck to your plan.

6. Overconfidence

This applies to how good your research is and how well you execute it.

One sign of overconfidence is frequent trading.

Studies show that overconfident traders trade more often.

Avoid this bias by trading less in the short term and investing more in the long term.

7. Familiarity Bias

This is when you invest in what you know.

This isn’t a bad strategy for beginners…

But at a certain point, you must support “what you know” with “what the numbers say.”

Popular companies can have poor fundamentals.

And unpopular companies can have great fundamentals.

Avoid this by learning how to analyze a company’s financial statements.

8. Anchoring

This is when you focus on a figure and use it as a benchmark.

If you bought a stock for $50/share, that price becomes your benchmark.

If it drops to $40/share, your eyes are still set on the $50 share price.

This makes it easy to ignore poor fundamentals and justify breaking even.

Avoid this bias by having an exit plan.

9. Endowment effect

When you value something more just because you own it.

When you combine this with loss aversion you get investors who don’t want to sell losing stocks.

You can avoid the endowment affect by sticking to your investment plan.

10. Sunk Cost Fallacy

A sunk cost is a cost that can’t be recovered.

The sunk cost fallacy is when you continue to commit money just because you’ve done so before.

If you started a DCA in stock and you change your thesis, continuing to DCA will only cost you more money.

Avoid this by removing your emotions from your investments.

That's it for this week's newsletter!

See you next week!

Wolf