Why cocky investors should eat humble pie

We all know that investing is essential to long-term wealth creation, as it can be a very rewarding and potentially lucrative venture.

But I was surprised when I was presenting to a large audience of entrepreneurs last week that while some were underconfident, many others were overconfident, which makes me wonder which is better.

Being underconfident means the investor is more conservative in their approach, as they prefer to invest in assets that are deemed safe.

While those who are overconfident tend to take risks and often fall victim to the illusion of control, as they believe their knowledge, experience or gut feelings can predict the market, which is often not the case.

They also tend to overestimate their abilities and underestimate the complexity of their investment decisions.

All too often, they assume that past successes are based solely on their skills rather than a combination of factors, which usually includes luck and/or favourable market conditions like many who invested in the Bitcoin boom.

Overconfidence also leads many not to do the required research and analysis. Instead, they rely on rumours or tips from a manner of unreliable sources. The challenge with this is that they falsely assume that their gut feeling is infallible, which often leads to poor investment decisions.

They also fail to adapt and learn from their past mistakes even when they are presented with solid facts, which is something I observed last week.

Their unwillingness to adapt is because they fail to acknowledge when they are wrong or when market conditions have changed and prefer to dig in their heels, and fold their arms in stubborn defiance.

When it comes to investing, particularly in the stock market, it is crucial that you approach it with a balanced mindset combined with a dose of caution. Overconfidence is a lot more dangerous than underconfidence as it tends to undermine sound decision-making and exposes you to unnecessary risks and potential losses.

Recognising when you are reacting from an overconfident mindset is not easy, as it requires self-awareness, humility, a commitment to gain the right knowledge and to take a disciplined approach to investing.

This also applies to those who are underconfident, as investors who are self-aware can mitigate any negative effects and increase their chances of achieving long-term financial success.

A good way to become self-aware is to ask yourself if you would give all of your money to someone to invest it with your knowledge, skill and experience. If the answer is no, then you are well on your way to becoming a better investor.

The best and worst performing sectors this week

The best-performing sectors include Consumer Staples up more than 2% followed by Utilities up more than 1% and Healthcare up just under 1%. The worst-performing sectors include Information Technology down more than 3% followed by Materials down more than 2% and Consumer Discretionary down more than 1%.

The best-performing stocks in the ASX top 100 include AGL Energy up more than 4% followed by Aurizon Holdings, Endeavour Group and Woolworths, which are all up more than 3%.

The worst-performing stocks include IDP Education down more than 9% followed by Cleanaway Waste Management and Virgin Money, which are both down more than 6%.

What's next for the Australian stock market

As I have said in the past, a week can be a long time in the stock market and this past week has certainly seen the All Ordinaries Index display the extremes of both bullish and bearish sentiment. After rising more than 3% in six trading days, the last two trading days may have caused investors to scratch their heads, as it has fallen more than 2%. So once again the market appears to be defying logic or is it?

After rising for six straight days, it is normal to see a few days down as markets don't just trade up or down, rather they exhibit a stair-like rise and fall.

What this means is that it is normal for the market or a stock to travel in one direction for several days and then retrace some of the distance it moved while still maintaining the overall longer-term trend.

The concerning issue right now, however, is the severity of the fall on Thursday given the market fell 1.66%. If it trades down on Friday, then my words of caution over the past few weeks will be validated, as probability suggests it will continue to trade lower and possibly down below 7000 points.

That said, this could just be a false move down before the uptrend continues although given the severity of the fall on Thursday, it will pay to remain diligent and not take on any unnecessary risks.

Get stories like this in our newsletters.