How to correct your investing biases

Click, click, click... chink, chink, chink. You know the sound as a fruit machine pays out. And there I was, aged ten standing in a stinking chippie and watching my mate rake it in. Simon was a couple of years older than me. So I thought I'd try to profit from his wisdom.

"Wot've you got to do? Show me." And he did.

In went my coins. The drum whizzed round and then -nothing. Again and again until all my money was gone. Since that day, I've never been interested in slot machines. The first cut is the deepest, they say. Early experiences, be they good or bad, seem to get ingrained into our DNA.

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Our earlyinvesting experiences are crucial too. They leave us with inbuilt biases that can be hard to correct. Today I want to show you a way of undoing some of the biases that hold you back. And how you can make the most of the helpful ones.

Why it's dangerous to be a pessimist - and an optimist

My earliest forays into themarkets were during the eighties - and largely speaking, I made easy money. It's probably what's made me an optimist on stocks -which can, at times, make me foolhardy.

But I know others whose experiences have left them disillusioned and cautious with stocks. One friend sold aproperty in 1998 and put it into the markets only to get stung by the millennium crash. He watched as the housing market climbed ever higher and his stocks went down the tubes. He's yet to get his stake back, let alone any profits.

Now he's cautious. And sometimes his caution pays, but usually it doesn't. It's the same for me. Sometimes my optimism gets me a black eye. So how do we learn to temper these emotions? Well we use an ingenious idea, one that is stolen from the world of architecture.

Learning from skyscrapers

Imagine you are standing at the top of a skyscraper during an earthquake. It is a pretty scary place to be. As the tremors build, it causes the building to sway ever more violently. So it's lucky that these days, skyscrapers have a fail-safe device to guard against it.

Right at the top of the building there's a massive lump of concrete that sits on a series of rollers. So when the building sways one way, the concrete moves the opposite way and stops the skyscraper swaying like a drunk on a train.

And that's what investors need. A counter-cyclical device to stop enthusiastic over-exuberance at the top of a market and give pessimists a kick up the backside when the market's at the bottom.

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Concrete for your investments

Now what I'm going to suggest isn't exactly earth-shattering advice. But I was given this advice many years ago and it's been one of the most important tools in my investment armoury since.

Once a month, I sit down and pen my thoughts on the markets. I note down how I feel about the market and which way it's going. I note why I made my recent trades and where I'm going next. I'm only talking about a couple of short paragraphs - it shouldn't take more than ten minutes at most.

After I've made my 'note to self', I'll then review the last six months of notes. From this I can see where I went wrong/right.

Around six months into our current bull market, I could see that I had been too pessimistic and hadn't released enough capital into the markets. So I started to build exposure - and that's done very nicely too.

By writing my thoughts down, I've got a reference point from which I can see clearly and without prejudice how my ideas relate to Mr Market. Believe me, keeping this sort of diary is like having a concrete counter-weight for your portfolio. Give it a go and see what you think.

And if you find it changes anything about your investments, drop me a few lines to let me know - therightside@moneyweek.com.

This article was first published in the free investment email The Right side. Sign up to TheRightSide here.

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