The way we think and behave, the core of who we are, our level of self-awareness with regards to our emotions have a direct and significant impact on our results as investors.
The psychology of investing is something which has been written about in books and articles. ‘Fear and Greed’ are concepts that are tossed around as clichés and as obvious drivers of sentiment in the share market.
The emotions an investor experiences are more complex than fear and greed. The challenge is measuring the interplay between these emotions and the success attributed to one’s psychology.
In the first part of this series, I want set the context with what ‘the market’ really is and also some insights that both Fahd and I have learned.
Years of investing later and we’re still learning by continuing to discuss this side of investing passionately and learning from our experiences.
The market is shockingly familiar
No amount of in-depth. fundamental or technical analysis of an investment opportunity can guarantee success on the share market.
Because investing is more than numbers and research.
It involves a market of humans wanting to buy and sell the same thing.
We may not have considered that we look at the market in the mirror everyday.
The market is ‘us’.
It is a study of how ‘we’ behave.
Some of us will think a company is not worth the price it’s trading at and sell. Others will think the same price is a bargain and buy.
1. The “market” isn’t a thing, it’s just a trading place where buyers and sellers come together
2. The “market” is neutral – it doesn’t know who we are, nor does it care if we are buying or selling
3. The “market” isn’t out to get us! If you sell for a price below where we bought, that’s down to us
The typical investor pattern
Most people invest on the underlying uncertainty from not understand how to price a company for the long term.
So they try and buy when “the market” is going up and sell when it is going down.
They are therefore constantly trying to predict what other people are going to do.
That means they sell the lows (when more people are panicking and selling) and they buy the highs (when everyone is ebullient and buying).
They then make a loss and blame “the market”.
Because markets are not separate beings with agendas of their own, they neither know nor care if you are in a particular stock. They will go up and down anyway and it’s up to you to judge the right time to get in or out of a stock.
Many people say “the market hates me” or “the market always steals my money” – it would be more apt to say “I don’t understand other people’s thinking”, or “I think I understand why others are selling or buying and where the opportunity is to go the same way or be contrary”.
The only way to beat the market is to have a long term valuation and buy when the price is below that and sell when it is above (after years, to avail of tax benefits, or not sell and take value from dividends if the company offers them). This is also why most short term traders lose money (studies have shown consistently that more than 85% of short term traders lose)
You can read the rest of Investing Psychology series on Tabarruk.
This is not financial advice. Please view our disclaimer.