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?
female psychology of investing
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.

investing logic emotions
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.

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7 responses to “Psychology of investing”

  1. Katya

    I am more a student of investing but just based on my decision-making process, I would have to agree women use their right brain intuition which can calculate factors faster than the speed of light.

  2. Plasticmoney888

    Women are less impulsive and will not purchase stocks on a recommendation. Even if they trust there broker to be honest they will sleep on is advise and make a decision only the following day.

    Men on the other hand can be convince in minutes to buy 5000 shares of a $20,00 stock but will negotiate the price of a BBQ for half an hour.

    Stocks price can be overvalued or undervalued it’s not like oranges or most consumer products. Its not a real market and greed is often the psychology of over-valuation. It’s a bet on the future and to a large extent a guessing game. It does not take a rocket scientist to know that big money in the market is made from privilege information. The Kennedy Family Fortune is only one famous example.

    They are not the only one. Options are exercise every day and reprice downward if needed diluting uneducated share holders.

    Automatic Money inflow comes in from pension funds every day and keeps feeding Wall Street.

    Publicly listed Corporate executives often make much more money than there shareholder who fund those company. Its amazing to read from insiders report and to see how they constantly print new shares to them self and dilute there shareholders in the process.

    Public company shareholders are to passive and the executive club get away with murder.

    Thank God there are exceptions and that is where I personalty invest money. Mark,the more a public company looks like a private company the more I like it.

    Psychology of markets is a game one can play but eventually you will be the victim.

    I personalty think that Criterias for investing are not that complex. Forget the upgrades and downgrades from the Casino.

    Look at:

    • Book valuation ratio to market valuation.
    • combine with Earnings to price.
    • Debt ratio to equity.
    • Dilution. Are there more shares outstanding at the end of the year. If so: Make sure you know why and if it’s beneficial to you equity per share. If there is dilution (No mater how good the Company is doing you are playing with fire)
    • Is the equity per share growing? At the end of the day: “That’s your only real valuation”. If it’s growing at 15-18% and the book valuation is not to far away from MKT price you have covered your down side risk and you will be growing your wealth.

    It’s also kind of nice to get a small dividend as long as it’s not to high as a percentage of earnings.

    Any thing else will make you look very smart wile you make a pile of money and will make you depress when the tide changes and you lose all your gains and more.

    Being rational in an irrational place is not easy.
    We could conclude like this:
    Buy growing valuation and if it gets crazy sell perception to the irrationals.

    1. Mark Biernat

      Women are more conservative because it has to do with one million years of evolution. They are about making sure they have a nest and things are save and sound, even if it means less. Men including myself have invested in tips with little research. Oh, I have regretted every one of those investments. This is why I know employ a little more disciplined approach to investing. It reigns in my emotions and impulses.

      Using criteria like you mentioned above in a methodical way, will narrow the universe of stocks to a manageable group of quality to select from. Once I have identified the group, I can use my emotions, or intuition or whatever, but I first need an initial screen of equities based on numbers and charts.

      The only problem which I have not over come is how prices tend to be forward-looking, expectations and incorporate much of the information you mention into the price before I discover it.

      The question is how to anticipate positive changes in income and balance sheet items before they are released or priced into the stock?

      To answer this some people look to fractal inference, others intuition, others charts, quantitative analysis and others just study the company and try to understand management’s direction and vision. If you can figure out how to be before the curve on a regular basis than you and I could have a few million in the bank in a matter of months.

      Once I get though some personal things (we just moved, I am writing software, etc) I need to refocus on this problem of finding the edge with investing. I do well, but I am not a liquid multi-millionaire yet.

  3. Plasticmoney888

    “The question is how to anticipate positive changes in income and balance sheet items before they are released or priced into the stock?”

    I also made stupid decisions but over time I came to realize that that information is: = “To money $$$” and no intelligent person will simply give me money against nothing in return. So, following my logic any free information is very likely not valuable.

    I have disciplined my self to never buy on any one’s so call tips or recommendation. Actually one way to make money could be to sell or buy puts on recommendations.

    “Anticipating changes in income and balance sheet” takes a special talent since it’s a call on information that is not public therefore not yet available. If you are a trader and capable of risk tolerance and are very familiar with a stock movements It can be done but it’s not for people with heart condition…. it’s kind of stressful and certainly not a game for novice.

    I find that most investors tend to confuse the Company they invest in and the public (Shareholders) that buy and sell that company and do give it its market valuation. The Company is the Company the stock price is the company plus or minus public perception of its present and future valuation.

    In other words, I first focus on evaluating only the company’s and am not influenced at all by the market capitalization that the public is giving it. I don’t care about that if it’s not compatible with my valuation.

    Money is made both ways of course and I do miss out on some great moves.

    However I know that a company I can mathematically evaluate but the publics reaction including Hedge Fund and large firms strategies I can not. There are to many unpredictable variables and that would be a talent I do not possess unfortunately.

    I favor using only objective research which is generally available and then making my own decisions.

    I find that there is often more money to be made on firms that are not recommended by investment firms or banks. One of the reason is that if a company is very healthy they wont need to raise money so no one follows them. If you have a stock screener you will find a surprising amount of Company with absolutely no debt. Who follows them ?

    I make exception to trading currencies(Careful)and turnarounds situations.

    One such turnaround sector is the maritime carriers. All very very beaten down stocks and some are starting to make money again. Thats not a recommendation of course… Ha ha ha it’s a sector not a stock anyway……..

    1. Mark Biernat

      This is the problem I have been wrestling with for years. I know it and it is hard to get around the issue, that is, the price factors in future expectations and valuations.

      The Company is the Company the stock price is the company plus or minus public perception of its present and future valuation.

      I have to second guess everything to get the edge and that puts my investing more on par with speculation than a system. Sure there are signals for anticipating future expectations on stock price surprises, but are there really? Every Hedge fund wizard and excentric stock player like myself is looking to be ahead of the curve and this moves price. Unil I find the Holy Grail of technical indicators I have resigned myself to using professional forcasting prediction model based on quantitive research like for example and from that universe of stocks use charts and my own factors, like you mentioned. But still there must be a be a better way to make my money work for me.

  4. Plasticmoney888

    One last point Mark I also think that what has make things more difficult in recent years his the unprecedented manipulation of the markets by the FED and also the economy by the Government.

    Things that logistically should happen do not necessarily happen anymore. We should be able in a free market to take decisions base on rational expectations. Instead is has become a “guessing game” about when one men “The Grand Master of Money’s Central Planing” Ben Bernanke and a few Keynesian bureaucrats that decides for the people what is best for the people which only ends up being good for the Investment Banks.

    1. Mark Biernat

      It is frustrating that in a free society there are a few puppet masters that run the show. This is not a conspiracy nor an exaggeration. I feel they are well-intentioned individuals that are given power though the law that should not be given to them.

      The consequence is they cause horrible damage to the economy (boom-bust cycle), create an injustice system of economics (I just paid a huge tax bills, yet, the money goes to ‘the haves’, while I myself struggle). Bernanke and the Keynesians in their arrogance intrench for future generations economic hardship (via byzantine government, debt and decreased market efficiency).

      What can be done? Vote them out and increase awareness of the reality of the situation. More people who are aware, the more things can change.

      The other option is try to profit from their buffoonery by being aware of the influence they have and the predictability of it and factor that into your investment decisions somehow. Of course minds could be better deployed solving issues that create real value. However, I have seen this in every society that has gross distortions of the market and the price rationing system (including the currency market). That is the clever and bright minds find ways arround the system instead of solving real problems.

      It is all disheartening. But still I maintain that the US generally has a free economy and for a person who wants to work use their talents anything is possible with a lot of luck.

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