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What is your investment perspective?

This website is devoted to understanding how our cognitive illusions affect us when we make decisions concerning money. We all view the world from our own unique frame of reference, and when our view causes analytical inaccuracies we call that a cognitive illusion or bias. Or and an old friend put it; our “stinkin’ thinkin’ is erroneous!

Today I want to show a few examples of how our perspective can change how we see our investments and maybe some errors we can guard against. Let me throw out a few examples.

  • First, an easy one: Every time a stock is traded, the buyer believes the stock will go up, but the seller does not. Different perspectives!
  • Imagine yesterday you bought stock XYZ for $20 per share, today you look up the share price and it is trading for $30 per share, and 50% gain in one day. How do you feel?
  • Another scenario: A month ago you bought XYZ for $40 per share, today it is $30 and you have lost 25% of your investment. How does that make you feel?
  • Scenario, Part III: Yesterday, you got fed up with your holdings in XYZ to do anything and you sold it all for $20 per share. Today the stock is going for $30. How do you feel?

In all of the cases above, XYZ is $30 per share but your feelings about that share price are completely different. The difference is your perspective based on your purchase or sale price.

The point I am trying to make is that the market does not know or care at what price we bought a particular investment. Our perspective, however, controls how we believe the market should go based on the price we paid. We have thoughts like: My investment is down, I just want to get back to even before I sell. OR This investment has doubled for me, so I want to buy more and do it again. This type of investment thinking has no correlation with where the investment will actually go from here.

Important Thought: The price you paid for an investment has absolutely no bearing on where it is going from here! The market for that particular investment is completely separated from your buy and sell decisions once you have acted to buy or sell.

If you want to manage your own investing, be it stocks, mutual funds, real estate or ostrich farms you need to analyze your holdings or prospective holdings on current market conditions. Once you have bought or sold something, that event is done and has no bearing for the future of your portfolio. I hope this information helps you with your personal investment analysis!

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3 Responses to “What is your investment perspective?”

  1. Allen Taylor says:

    Nice writing. You are on my RSS reader now so I can read more from you down the road.

    Allen Taylor

  2. […] one fair one–but they also have different perspectives on investing. Following up on Tim’s post, different people can look at the same world situation–a depressed stock market in which […]

  3. Alex says:

    So true! I was working at a bank during the crash of the tech boom, and it was amazing how people hung on to the incorrect perspective when dealing with their stock market investments.

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