In times of overheated stock markets, emotions can also run hot. We can see that well with the CD Projekt stock right now. I don’t hold any CD Projekt shares, but I’m watching the events and the discussion from the sidelines. What I see is that many investors ask for a CD Projekt stock forecast. The motivations are very different. Some wonder if CD Projekt is a buy now, the others are afraid to catch a falling knife. I think CD Projekt is a perfect example of certain cognitive mistakes that investors (myself included) make all the time. That is why I want to describe those mistakes in more detail. Furthermore, I tell you how I try to avoid them.
Emotions are as normal as they are dangerous
Emotions are entirely normal in investing, from my point of view. We are all delighted when we have invested in a good company and the share price rises. Conversely, we get frustrated when we buy shares, and the share price falls. Well, sure, most of us go to work hard for the money. Of course, we react emotionally when the value of our money or assets increases or decreases. And then there is also greed and fear. Both emotions drive us into investments, even though we may worry that they are unwise. But we also want to get a piece of the wealth and the unique opportunity. And if we fail, then we all fail together.
I believe that very few, if not, perhaps no one, is capable of being utterly unemotional about their investment decisions. Emotions are, therefore, normal, but they are also dangerous. For example, they can distort the view of the risk/reward ratio. They can cause investors to break their own rules exceptionally. Then it becomes dangerous. To avoid crossing the line into this danger zone and self-reflect on my own choices, I wrote this article.
There are two decisive cognitive misconceptions concerning a CD Projekt Stock Forecast
From my perspective, a CD Projekt stock forecast is challenging. In my view, the following cognitive biases are in particular significant, which we should all understand.
An important parameter is loss aversion, which concerns investors who have already invested in CD Projekt stock. Most investors are familiar with loss aversion and know that it tends to weigh losses more heavily than gains. Nevertheless, we should always keep in mind that this aversion could also affect us and distort our judgment. Loss aversion causes investors to hold on to bad stocks because they are afraid of realizing losses. Of course, I am a long-term investor, and I know that there are very few reasons to sell a stock.
With that having said, I also wrote:
It is also essential that you decide at the same time as buying a share under which circumstances you will sell the share again. This is closely related to your investment strategy and wealth management. Are you more of a buy and hold type of investor or more of a stock picker using other criteria such as trends or fundamental valuations. What is important here is that you have a strategy and that you follow this strategy. This will help you to act rationally and not become emotional (see above).
Another reasonable reason for a sale may be that your investment thesis is no longer intact. If you analyze rationally and find that a company no longer has a future in fundamental terms and no longer meets your initial investment criteria, there is no reason why you should not sell shares.
So if you are convinced that a stock or company no longer has value, you should not hold onto the stock longer than necessary only because you are afraid of losses. Losses are part of investing, so you better not let fear cloud your rational view on the matter.
It is particularly dangerous when loss aversion is accompanied by confirmation bias, which tends to select and interpret information so that it confirms one’s own opinion. The confirmation bias is tempting. It allows us, for example, not to have to deal with our loss aversion by interpreting the information in such a way that, for example, price losses are only the result of panic selling, and prices will rise again. Therefore, if you are invested in the CD Projekt stock, you should not overweight certain opinions just because they support your investment thesis.
However, I have heard several shareholders now saying that reviewer xy said the game was great, it had some flaws, but they will be fixed by early next year. But what about the programmers who say that no significant improvement in gameplay (AI, etc.) is possible? The comparison with GTA V also suggests a game that doesn’t live up to what the management promised. I don’t know what is true. Nevertheless, I have the feeling that many investors here only look at one perspective from the beginning. However, in their risk assessment, they do not even consider the scenario that perhaps the other view could be correct after all.
Misconception of investing
What I’ve noticed among some CD Projekt stock investors is a simple misunderstanding about investing. CD Projekt is a company with a strong track record. Currently, however, they have put everything on their latest blockbuster game, Cyberpunk 2077. So the business is hugely dependent on the success of the game, on one product, on a one-trick pony, which makes the CD Projekt stock a risky investment by its very nature and would even justify a discount.
But this is not the case, and the cause lies in a gross cognitive misconception. I wrote about this in an article on Seeking Alpha in great detail. To sum it up, the problem is that investors confuse an investable business with a good investment. They see shares not as evidence of ownership of great companies but as a betting slip ( you can call it ‘TEV’s betting slip theory’, commonly known as ‘the greater fool theory’) on higher share prices. So what I would recommend to you is the following:
You must make a clear distinction between an investible company and a good investment. Just because a company is successful, grows, and generates better earnings and cash flows, it does not automatically become a good investment. The question is how much you have to pay to become the owner of these profit and cash flow machines.
It follows that the following arguments should never be the reason for buying CD Projekt stock:
- The company already has xy pre-orders.
- The company will make xy sales in the next year.
- The profit will increase x-fold.
What you should be asking yourself instead is this:
- How many years will it take for the expected profit to refinance my purchase price?
- What happens to the company and my money if Cyberpunk 2077 really becomes a fiasco?
- If all buyers of this stock assume that the problems can be fixed, isn’t the company’s value without problems already priced into the stock price? F0r what potential am I actually paying the price then?
I am not invested in CD Projekt stock. That doesn’t mean I’m a better investor or saw the disaster coming (I’ll get to that below). I want to explain how I invest and minimize risky stocks’ risk in the next points.
Look, investing in stocks is a form of wealth management. Investing means nothing else than transferring value from one asset class (money) to another asset class (shares/equity). Usually, this money is hard-earned. You don’t want to waste it. Wealth management, therefore, means, first and foremost, preserving the value. Only after that comes the second big goal, and the reason why we don’t just leave money in our bank account or under our pillow. We want to increase value and invest in excellent companies to achieve this goal.
But as always in life, the second step never comes before the first. Accordingly, the most important thing is that we do not reduce the value of our assets. Hence, we try to avoid unnecessary risks. And what is riskier, a betting slip, or an investment case where you own a company that pays you a profit or cash flow every year (for example, in the form of increasing dividends)? Since I’m all about minimizing risk and preserving my wealth, I’d always go for a substantial investment, even if it meant missing out on some upside percentage, which is just my opinion, and you are welcome to argue otherwise 🙂
The last rule that shall never fall
As investors who choose individual stocks to invest in, we are exposed to high risk. If you pick ten stocks and two of them lose 50 percent, there’s a good chance you’ll perform exceptionally poorly compared to the market. It gets even worse when one of these companies accounts for more than ten or even 20 percent of your total assets.
Therefore, from my point of view, there is one rule that really should never fall. And this rule is called: Proper risk allocation! No matter how much you believe in a company, reduce your dependence on that investment, which does not refer to your profits’ value but your initial investment. Everyone has a different pain threshold. For me, it’s 3 percent to 6 percent. I already consider investing more than 10 percent of your available money in one company to be mildly negligent.
For example, I think TeamViewer has excellent prospects and huge upside potential. I will continue to buy shares in the company. However, I still make sure that my invested capital in the company is always in the mid-single-digit percentage range of my total investments.
Last words: After the apocalypse, everyone has always known it
Finally, a few words: I see a lot of gloating for investors who bought CD Projekt stock. Remember that the stock is still massively up for investors who bought it a few years ago. But that’s not what I’m getting at. I think it’s terrible to laugh at other investors when they have unfortunate investments. It turns investing as a form of wealth management into a kind of competition. And that’s precisely what’s dangerous because it leads to the above-mentioned cognitive distortions. Furthermore, this is simply a bad character trait. In hindsight, we are always smarter…
More importantly, we need to be aware of the mistakes investors make that lead to bad investments (even in great companies). In that sense,
I wish you all the very best,
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