• Trustees Private Wealth

Nov 17, 2022

Investing Psychology 101: How to think like an Investor

When it comes to investing, there are a lot of different strategies and schools of thought. But at the end of the day, all investment success can be anchored on one thing: psychology. The ability to think like an investor is what separates the average Joe from the Warren Buffetts of the world.

In this blog post, we'll explore some of the psychology behind successful investing and share some tips on how you can start thinking like an investor today.

Applying Psychology to Investing

At its core, investing is all about making decisions with your hard-earned money. And as we all know, decision-making is not always a rational process. Our emotions often come into play, clouding our judgement and leading us astray. That's why it's so important for investors to understand the psychological biases that can impact their decision-making.

Some of the most common psychological biases that can trip up investors include confirmation bias (the tendency to seek out information that confirms our existing beliefs), loss aversion (the tendency to prefer avoiding losses over acquiring gains), and anchoring (the tendency to rely too heavily on the first piece of information we receive).

By understanding these biases and how they can impact our decision-making, we can take steps to avoid them. For example, if you're susceptible to confirmation bias, be sure to seek out a variety of opinions before making any investment decisions. Or if you're prone to loss aversion, remember that all investments come with risk and there's always a chance you could lose money. The key is not to let your emotions get in the way of your decision-making.

Thinking Like an Investor

So how do you start thinking like an investor? Good investors understand the difference between investing and speculating. The latter is where something is bought with a view to a short-term gain and generally involves higher risk relating to a specific asset or limited range of assets (undiversified risk). Investing is where something is bought with the expectation of a long-term gain. Investing involves holding a range of assets and hence being exposed to ‘market’ risk, or diversified risk.

Getting clarity about the difference between and asset and a liability is important. An asset is something like a share, a fund or property that has the potential to grow over time. Assets will ‘feed’ you. Liabilities are things that will go down in value – they tend to ‘eat’ you, i.e. consume your financial resources.

Investors develop a clear investment plan and follow it, albeit reviewing it from time to time if circumstances change. This means setting goals, determining your risk tolerance, and creating a diversified portfolio that meets your needs. Once you have a plan in place, it's important to stick to it and resist the urge to make knee-jerk decisions based on market fluctuations or personal emotions.

It's critical to stay disciplined with your investing. This means buying when everyone else is selling and selling when everyone else is buying. It might not feel good in the moment but sticking to your plan and not letting fear sway you will pay off in the long run.

One of the first few ways to improve your mindset is by knowing what qualities, characteristics, and traits make a good investor–and what makes up a bad one.

Beneficial Characteristics of a Good Investor

Developing the ability to think like a good investor is critical for anyone who wants to be successful in the world of investing. It is said that the stock market is more a measure of human psychology than it is of economic conditions. If that's the case, then to be a successful investor, you need to understand how to think like one. Here are some key characteristics of a good investor.

Good investors are Rational

This may seem obvious, but it's worth stating because it's often forgotten in the heat of the moment. When emotions run high, it can be tempting to make impulsive decisions - but remember, investors need to be rational. They make decisions based on data and analysis, not on emotion. So, if you want to be a successful investor, you need to remember to keep a cool head and make decisions based on facts and logic, not on emotions. This goes both ways - whether you’re ecstatic or furious - your investing decisions should say the same regardless.

Good investors are Patient

Investors know that good things come to those who wait. They're patient because they know that rushing into a decision can lead to mistakes being made. The most successful investors in the field like Warren Buffet think long-term. They don’t flail and crash when the market does - they stay calm and ride things out.  So, if you want to be a successful investor, you need to learn to be patient and take your time when making decisions.

Good investors are Disciplined

Investors know that sticking to a plan is crucial for success. They're disciplined because they know that deviating from their plan can lead to losses. So, if you want to be a successful investor, you need discipline in your habits, plans, and goals.

Harmful Habits of a Bad Investor

It’s easy to get caught up in the world of investing. Access to the internet has made it easier to access a lot more information. Being able to screen out what is important is critical. It is easy to get led astray by lots of ‘talking heads’ or people trying to peddle a particular theory or product. A lot of what you see and hear is nothing more than ‘noise’. The key to avoiding distraction is making sure you can spot what bad investors are doing and keep far away from that path. Here are some key characteristics of a bad investor.

Bad Investors are Overconfident

Investors need to have a level of confidence in themselves when it comes to how they carry themselves and make financial decisions. However, there is such a thing as overestimating one’s own capabilities. When you are overconfident, you are prone to make mistakes like overtrading (buying and selling often), or thinking you have unique insight. As an investor, you should always strive to ground yourself with knowledge and continuously learn from any mistakes you make while trying.

Bad Investors are Egoistic

Cognitive biases are an investor's worst enemy and ego plays a big role in further ingraining these concepts in a person’s mind. Ego investing plays a major role in the downfall of most investors who cannot accept a loss. In investing, there is no absolute reassurance that every investment will have positive returns. As an investor, you need to know when to let go of your ego and turn your loss into an opportunity to move forward.

Bad Investors are Self-Sabotaging

When you have selective memory on what you want to remember and accept - that’s a form of sabotaging yourself. Bad investors intentionally forget bad decisions and consciously only choose to recall good memories. This can be detrimental to your learning process in investing. Selective memory skews your overall view towards investing and may encourage overconfidence. As an investor, you need to make your habits work for you, and having this in mind can help you avoid setting yourself up for failure.

Wrapping Up

All of these behaviours are natural expressions of human psychology. None will derail a solid investment strategy and practice by itself. In combination, they are return-limiting.  With investing, it’s about waiting, and accepting sometimes you may experience short term losses, in exchange for longer term gains. All three qualities are key to determining your success in the long run.

It can be pretty daunting given all the information out there, things you can access globally now and the myriad of decisions that need to be made. The good thing is, you don’t have to walk the investing journey alone.

How We Can Help

At Trustees Executors, we have financial advisers that will guide you to and through a path that suits you, will help you build the correct mindset, and will keep you focussed on achieving your goals. Our team of experts constantly reviews and revises your plans with you according to what is relevant to the market and what you want – we’re here to help! Contact us today to start your investment journey, or get another view of progress on your current journey.

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