How to Avoid this Behavioral Pitfall- Confirmation Bias

Have you ever made an equity investment with the belief that you have researched all the information that supports your investment decision, while neglecting information that could contradict your investment decision?

 

Yes, you may have cherry pick to read info that make you comfortable with the said investment, while play down the opposing views or information.

If yes, you might have succumbed to ‘confirmation bias’, which is one of the behavioural pitfalls in investment.

When I invested into Masterskill years ago, I read all the fantastic story of investing into Masterskill of which it enjoys the best of both world, the resiliency of education and healthcare sector. I bought into the share and yes, lost money.
 

I read info that supported my investment decision, and neglected information that could weaken my investment decision such as heavy reliance of Masterskill on PTPTN to fund the students’ course fee and rising number of nurses and inadequate training or work placement. All these are opposing information that will weaken my decision.

After I realised my losses, then only I noticed the reported profit per student of Masterskill is so high compared to other learning institutions, which should raise a yellow flag for a rational investor to analyse further.

I should have researched all of the above before investment but I played it down.

Subsequent to this painful experience, before I make any equity investment. I will always ask the following questions and these questions will be asked on continuous basis so long I hold the shares.
 

1)      What could go wrong?

2)      Have I considered opposing views?

3)      Have I sought out disconfirming evidence that may suggest my investment thesis is flawed?

4)      Talk to fellow investor who avoided the stock?

Before you make any equity investment in the future, do assess if you have fallen into confirmation bias, if yes, hopefully the above questions could minimise this behavioural trap!