Often called behavioral finance, the psychology of investing behaviors and strategies (and how significantly that psychology can affect markets) is a growing field that’s gaining a lot of attention.
The supporters of behavioral finance believe that investors make mistakes in investing for the same reasons most people make mistakes elsewhere in life. That human biases and misunderstandings, both emotional and intellectual, can result in misguided moves in both directions — which can cause unpredictable behavior within the market.
Yost Partners was up 0.8% for the first quarter, while the Yost Focused Long Funds lost 5% net. The firm's benchmark, the MSCI World Index, declined by 5.2%. The funds' returns outperformed their benchmark due to their tilt toward value, high exposures to energy and financials and a bias toward quality. In his first-quarter letter Read More
Just as marketers and advertising specialists study and investigate the habits and motivations that influence buying decisions, banks take time to pick apart the psychology of why and how most people invest. It allows their sales and wealth management teams to better pinpoint the behaviors that can turn you into a client.
But if you take a little time to study them yourself, you can identify your own self-sabotaging habits, and help groom yourself into a better investor. We’re not all born with what it takes to make it, but as with anything in life, hard work, diligence, and self-improvement can go a long way.
If you’d like to learn what psychological skillsets and habits can help you be a better investor, a good trick is to look to some of the greats. George Soros, Peter Lynch, and even Warren Buffett all demonstrate some of the same characteristics.
Be a Self-Improver: Learn Proactively
Most of the best investors were always learning, and constantly reading. And what they learn and read about isn’t always financial in nature: books, magazines, journals, all about everything from self-improvement to science, and more. A great goal could be to begin reading several news articles a day from different categories, or to try to work up to reading a few new books every month.
Be Cautious: Have an Exit Strategy
Another interesting note should be given to exit strategies. Most investors will invest without ever considering the circumstances which might cause them to want to ditch a bad investment. And many others get wrapped up in the sunk-cost fallacy, which traps investors into a habit where they throw good money after bad.
Whenever you invest, spend a lot of critical time on developing your exit strategy and setting your exit parameters. Of all the psychological skills for success, knowing when to quit is among the most important.
Be Reserved: Reduce Your Emotional Attachment to Winning
Ted Turner likened investing to a slot machine: there are ups and downs, and patience is always the best strategy. Successful investors don’t abandon their strategies because of winning or losing streaks, and will instead respect data and market conditions, making financial decisions critically. Average investors will almost always invest based on emotions: liking the concept of a company’s strategy or product, for example, rather than looking for a holistic projection of its likely success. So, control your emotions, and invest more like you’d play poker: with the long game in mind.
Be Organized: Create a Strategy
Why do you pick the investments that you do? While most famous investors have had variable strategies, from diversification to focus strategies, they all at least had a sound business and investing strategy, which they maintained and groomed and perfected. Some preferred long-term investments while others invested for short-term gain. Some relied on technical information and market data, while others looked for good fundamental investments. Play to your strengths, but create a strategy you can stick to and that is scalable to your successes.
The Bottom Line
Chance has a great deal of power in every investment, and no one can predict the future. But the tips and tricks above can help you improve the self-defeating habits suffered by most average investors.