Avoid These Three Basic Mistakes Made by Investment Professionals

According to Aalto University Professor of Finance Markku Kaustia, in addition to wasting resources on individual analyses, investors and investment professionals typically make the same three mistakes over and over again: Distance bias, overconfidence in their own success and excessive portfolio management.

Tiia Lappalainen, 17.09.2019

The view that you somehow know better those companies that you are familiar with can result in myopia and excessive self-confidence in your own analysis, Kaustia says.

“Often the benefits of knowing Finnish companies, or a specific industry, for example, are exaggerated. This sector wouldn’t be global in scope, if concentrating on a single item like this gave you a great advantage in some way.”

Another typical mistake is the unwarranted belief in the success of your own analyses. According to Kaustia, this could be avoided if investment decisions were documented better. This would also create an opportunity to learn from your mistakes.

“Careful accounting and documentation on how the decision-making process progressed and how the decision was reached is still surprisingly rare. Human memory is imperfect; we are liable to remember success stories better. Documenting a thought process is difficult, which also makes learning from your mistakes challenging.”

The third typical mistake that Kaustia mentions is making excessive changes when managing a portfolio, and monitoring the markets obsessively. When you have no control over something, you try to maintain the illusion of control by at least making yourself busy, Kaustia says.

It’s also easier to justify your work to customers, if you can show frequent changes in the portfolio.

According to Kaustia, global knowledge of the investment sector will be more and more important. Read more about the future skills.

Kaustia is one of the instructors at Aalto EE's The Certified European Financial Analyst (CEFA) -program. The program provides you with uniform high-level competencies and entitles you to use the well-known CEFA title. Read more about the program that starts in October 23, 2019.

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