By Thomas Kostigen
An acquaintance of mine decided to join an investment club to learn more about investing and perhaps co-invest with other members. He indeed learned quite a bit about investing, met one of the Rockefeller heirs who happened to belong to the group, graduated into options trading and then lost a bundle.
The story of investment clubs, where amateur (and sometimes professional) investors share knowledge and research and often invest together isn’t anything new. Clubs are legion and have proliferated since the World Wide Web began and has fostered sites such as MeetUp, Facebook, LinkedIn, and even Craigslist, where like-minded folk get together in-person or virtually and discuss, engage or invest in their common interest.
Investing this way has certain upside, as my acquaintance discovered: investment ideas and lessons to be learned are passed about, providing welcome opportunity that sometimes translates into huge investment rewards. But then there is that downside: safeguards for bad ideas and investment decisions gone wrong. This is where a professional financial advisor plays an important role and where heeding objective advice can mitigate risks.
Still, it’s often fun to interact with people who have similar interests. The dawn of themed investment funds and categories that span from environmentalism to technology to community-based initiatives to outer space has segmented investors into readily identified groups. And groups of people like to get together and discuss things.
Joining an investment group isn’t necessarily a bad thing, as long as you understand that herd mentality and often subjective, or what’s called “cognitive boas” often takes hold.
According to the website A Very Well Mind, which provides news, information and research on the topic of psychology, “Everyone exhibits cognitive bias. It might be easier to spot in others, but it is important to know that it is something that also affects your thinking. Some signs that you might be influenced by some type of cognitive bias include:
- Only paying attention to news stories that confirm your opinions.
- Blaming outside factors when things don’t go your way.
- Attributing other people’s success to luck, but taking personal credit for your own accomplishments.
- Assuming that everyone else shares your opinions or beliefs.
- Learning a little about a topic and then assuming you know all there is to know about it.”
In short, cognitive bias is receiving confirmation of your ideas by people who share your ideas, and tuning out people who oppose your beliefs. Obviously, this syndrome plays out most in the political spectrum. However, investors can fall victim to this type of bias, too. Millennials especially are investing in packs via popular trading apps and social media platforms like Reddit, Discord, and Telegram. The packs often run in the same direction on quick trading ideas and take on perceived notions of opportunity without much regard for rigorous research. Like a game of musical chairs, it can be fun unless you’re the one left standing alone; you lose.
Objectivity should be an investor’s best friend. It’s important to remember that while investment clubs celebrate commonalities, such as, for example, those who may be interested in environmental, social and governance (ESG) issues, lacking is the benefit of opposition.
My acquaintance learned the hard way that strictly positive feedback can produce negative results.
Thomas Kostigen is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Thomas is a best-selling author and longtime journalist who writes about environmental, social, and governance issues.