How your pride and prejudice could hurt your returns

The best investment research is independent and thorough. Unfortunately humans aren't known for being objective.

Can I tell you a dirty secret of mine?

Yes? Well here it goes. All of my personal electronics are, in some way, connected to Apple (NASDAQ:AAPL).

My phone is an iPhone, I have an iPad, my TV is connected to Apple TV and even the laptop I am writing this blog on is a Macbook Pro.

It's shocking isn't it? But why do I feel the need to confess to my Apple related sins? To show that in life we form all sorts of irrational biases and it comes out in our behaviour.

Very rarely do we begin researching a company that we have no prior knowledge or opinions about. We'll often have some view that has been formed, conscious or unconsciously, through our experiences, personal preferences or even based on the opinions of friends and family.

The problem is that these biases can have a dangerous impact on the quality of your analysis if left to their own devices.

Identify your biases

Bias begins right from the very start. For example, you've chosen to research XYZ as you believe it is cheap/expensive.  

Therefor, before you even consider opening up that annual report, first sit down and identify any preconceived idea that applies to you and the company in question.

Ask yourself, what do you expect the result to be and why? This one question can help set you free, identifying what your biased result would be.

Now think about all the experiences you have ever had with the company and how this might be impacting your view of the company. For example, considering the fact I worship at the house of Jobs, I would imagine I would have a much more positive view on Apple stock than say Microsoft (NASDAQ:MSFT).

Minimise the impact of your biases

If you are completely honest with yourself and do the above process right, you might be surprised at just how much intellectual baggage you are bringing into the process.

However, now they've been identified, you can at least take steps to minimise their impact. A few simple tricks can help you.

Firstly, let the information drive the direction of your analysis and not the other way around. The truth will have some form of qualitative or quantitative data to prove that it is right. Focus on the facts.

Secondly, actively seek out data and opinions that would prove your investment thesis wrong and consider all possible scenarios, even those you think are of low probability.

Regardless of how rational you think you are, accept that you will have some form of bias. Luckily, with a bit of effort, we can get rid of them as easy as we formed them and your investment returns will thank you.

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