There is a behavioral bias that many investors and speculators are highly subject to. This bias is comparing their returns to others.
Professional investors, portfolio managers and security analysts do it every day. Given that the investment industry constantly compares professionals to each other, it is just a fact of their existence in the business.
Individual investors compare themselves to others too. While there is no requirement to do so, it is just part of human DNA. We all have a tendency to compare our performance to others.
Should individuals compare themselves to others? The answer to this question is not clear cut. There are benefits of doing so, but there are also costs. Like all things in life, balancing perspectives is essential for success.
The person that someone is comparing themselves to may be buying securities that are highly speculative and over-valued. This means the higher performer may be doing very well for the time being, but be taking excessive rates of risk. Now, if the underperforming investor adds the more speculative investments to their portfolio, they might increase their upside potential AND their downside risk. Furthermore, they are usually buying the speculative securities at higher prices than the person they are comparing themselves to. Therefore, they are extending their risk.
The key point to keep in mind is that individual investors don't have to chase the higher return like a professional. Think of it this way. If we are running a marathon and someone starts to sprint at the 5 mile mark, they will be ahead for a short time, but they will burn out quickly. Should we keep our standard pace, we will eventually pass that sprinter as he stops to be picked up by the "sag wagon"!
"The big question about how people behave is whether they've got an Inner Scorecard or an Outer Scorecard. It helps if you can be satisfied with an Inner Scorecard. " - Warren Buffett
Be safe, be smart, be prepared, be well read and be successful!
