Psychology of investing

If you want to invest well you need to learn one thing, how to tune out the noise. This is the psychology of investing. Experts have written many books on this topic, however, they are all wrong. Why? There is only one rule for investing in the stock market or currency market or any other exchange when it comes down to your thinking and emotions. What is that rule? Play your own game.

  • At the end of this post please comment too if you are an intuitive market player or logical market player and why?
I tend to think women have an edge in interpreting subtle psychological cues and this extends to investing. When my wife (above) looks at an investment she looks at it from a 180-degree different perspective than I do, even if our conclusions are the same.

I have traded stocks since I was fifteen. I learned the hard way how to play the psychology of the market. I hope you can learn from my advice.

What motivated you, emotions or logic? I tend to be more left-brain as a chess player.

Investing and chess a similar in that they are logical activities with a mix of psychology. If you are investing or playing chess and you are listening to the noise or even advice of people around the table, you are playing other people’s game. No expert chess player does listen to the people around him nor his opponent, during a live match.

I do not recommend you do if you have invested in the market. You might want to read up and practice with paper trades whether you are a trader or a long-term buy and hold person before you put your money into the market. However, you once in do not think you will read the psychology of the market. Do not think you can react on news faster than computer programs or insider trading? Think again.

A psychological approach to trading stocks

The best book on the understanding human behavior is by Stan Weinstein. This basically uses trend analysis. Psychology might make women feel less guilty with their lives, I guess, but it has little place for the battlefield of the bulls and bears in the market. Making money off emotions in the market is almost, but not quite as bad as trying to predict the market with Astrology. It does not work. The only people who make money with psychology are people writing books and newsletters.

If there is an edge in the trading it is playing your own game, this could be called intuition but it certainly has nothing to do with the interrelationship between the feelings of the aggregate market.

The reason that psychology is nonsense when it comes to trying to systematically predict the market is, in the short-term the market is a zero-sum game. This means for every winner there is a loser. Only in the long-run does it become a positive-sum game.

  • The reason is prices are expectations and forward-looking, therefore the psychological element is already built into the price.

Perhaps the only way to objectify this process is to look at trend analysis, as mentioned in Stan Weinstein’s book.

If you think you are so smart and can make money off the stock market or trading with psychology, be my guest. However, let me know about it if you do. It will only be luck. It comes back to my basic point.

  • Prices are expectational and forward-looking by their nature and psychology is already factored into the current price.

Wall Street traders have perfect information in this efficient market, so do not think you will beat the traders.

The human element is already in the price. Do not think otherwise. Breaking news and fear move too fast and already reverse themselves by the time you log into your discount broker account. I have tried this before as I was watching new feeds live reacting to the market with my laptop by the side but by the time the trade was executed, the trending price already jumped. It was the biggest and fastest free-fall in the history of the market and I was trading as it was going down, but the execution price already jumped as computer trading beat me. It is zero-sum to beat the market on emotions or trading.

The best way to win in the stock market with psychology is to be a chess player, be Mr. Spock but do not read books on the psychology of the stock market.


Does ethical investing work?

When I was a broker it was trendy to invest in socially responsible mutual funds. The question is does this investment strategy work when it comes down to returns?  These funds underperformed other mutual funds. However, for me ethical investing works and I recommend it.

What is socially responsible investing

There are two parts to this definition of what to exclude and what to include. I think everyone should do the first and if you are idealistic you might want to consider the second.

What not to invest in – This investing is excluding things commonly known as sin stocks. I think this is clear. However, I have an added ideal, that does not invest in anything that would take advantage of human loss of life, such as speculating or profiting from a world trouble spot that resulted in human suffering.  For example, there was an oil spill where human lives were lost. I do not want to invest in this stock connected with this downturn. I do not like speculating on anything to do with war.

Some people extend this to not investing in governments that are not up to par with human rights.

What to invest in – Things that help the world from alternative energy to health.

Why use ethics as a screening criterion?

Why use ethics at all for any choice in your life. Basically, that is something you have to answer for yourself. However, I would say that in the universe of potential investments filtering out unethical companies are not going to hurt you. Why? Because has millions of things you can invest in. Almost anything from Art to Stocks, unless you are really limited in your creativity you can find ways to win and profit without putting your money into something harmful.

Why does socially responsible ethical investing work for some and not for others?

Normal reasons, simply some people are good stock pickers and some people are not. It has nothing to do with this style of investing.

Use your code of morality to make Wall street picks

Nest steps – where to put your money

Simply pick stocks like normal and exclude the ones that are sin stocks. If you really want, research the Domini 400 Social Index (DS400). This is an index of stocks that ha tos meet certain criteria for being green or responsible. It is interesting to note that 250 equities out of the S&P 500 are in this index. Calvert funds also has an index. However, I do not like investing in managed funds and indexes like this.

I prefer a lean portfolio based on a true and tried stock picker like Jim Jubek and next screened for social responsibility. While at the same time being conscious of the moving average of the market index as taught by Stan Weinstein.

My basic idea for the stock market: Jim Jubek + Stan Weinstein + ethical investment filter = good choices.

One more thing about having a code of ethics or morality to your choices is it is good karmically. I do not know if such thing as karma exists, but does it not sure feel like there is? Our life experiences are very subjective so we can not measure something like this. But think back on your life, do you not feel the times you were honest and good life seemed to work better than when you cut corners?  A good conscience gives the best long-run returns. Win lose or draw with adding this one last filter for morals basic on your philosophy of good, will make you a winner.

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