In general people are wonderful, if you look around you can see many traits to be duplicated. Having said that, Scott Barlow wrote a column in the Globe and Mail called 5 ways human psychology can wreck your portfolio. Scott writes when we existed our main goals was not to eaten by predators (stay alive), finding food (eating on a regular basis), being social (learning to live with others) and procreation (having children). Many years have gone since the early days, and sometimes when we look around we do not see many changes.

Mr. Barlow 5 picks of the ingrained psychological tendencies that investors must guard against to make investing more successful.

1. Loss aversion/anchoring    For investors, losses feel worse than gains feel good. This means according to Tim Richards author of Investing Psychology that if you buy a stock (after your due research) at $15 and saw it drop to $12, you will not likely sell even if the stock market in general is going down. The investor would rather believe the stock will come back to $15 and all will be good. Selling early is hard.
2. Herding  People like to do what other people are doing, this can be a good thing. However the time to buy is before the stock market rises makes the front pages of the newspaper. By the time, it is newsworthy for the mass market most of the bull market will be over and people buy high, hold and sell low.
3. Choice supportive bias or confirmation bias  You have an idea, do your research and come to a conclusion. Soon you are reading or hearing that others agree with your conclusion, this makes you feel good. The tough part is to read the negative aspect of your conclusion.
4. Regency bias This concept refers to the idea we expect previous events to repeat themselves. In normal times we expect to see a cycles of up and downs for the stock market. The last down was the collapse of the real estate markets and liquidity in the capital markets (that may be once in a lifetime) are you being too conservative?
5. Outcome bias This is the belief that a good investment outcome automatically means the process to select the investment is a good one. (if you are an athlete and did well, you will review what you did and try to repeat it). The problem with the outcome bias is stock prices will go up or down, but there is not a 50/50 chance it will do either.

Linking to dividend paying stocks, to start we all have biases. If you agree with that then you can move along. Sometimes the biases are because we are human, and for those ones we have to recognize them and try to make rational, objective decisions. The are methods to try to go around the biases, one method is have a longer time frame and try to purchase profitable companies which pay dividends. Whether the stock goes up today or tomorrow will not matter, but it will not go down too much and while you wait you earn a good dividend return. Because the company is profitable, the street will recognize it and the stock will trade at higher multiples which means capital gains.

There are more questions than answers, till the next time – to raising questions.