Have you heard of the most secretive club in the world of investing? The strangest thing is that even its members do not know they are a part of it. It’s called the Dunning-Kruger Club. It consists of people with a low ability to perform a task (in this case investing) who MASSIVELY overestimate their ability to do so. All members share one thing in common - the cognitive bias of ‘illusionary superiority’. And like most cognitive biases, it means they are unaware that their investment decisions are being impacted by these forces. If you want to know whether you are a member of the club, ask yourself the following questions: 1. Do you lack formal education or training in finance, accounting or running businesses, and do not think that it is important to make smart investments in the share market? 2. Do you think you are much smarter than the ‘average’ participant in the share market (and do not mind reminding people just how much smarter you are)? 3. Is a SIGNIFICANT part of your savings made up of 1 or 2 stocks? If you answered yes to all the questions above, you ARE a member of the club. If you would like to remove yourself from the club, it is simple. Call a good financial adviser.
Article contributed by Andrew Mitchell Founder of Ophir Asset Management.