Successful investing is often as much a matter of psychology as strategy. The human brain can be its own worst enemy, so people who follow their instincts often make mistakes that cost them money. One of the tricks to successful investing is understanding the psychology of good investing and training your own brain to respond in the right ways at the right time.
A disciplined mind is a successful mind when it comes to investment. After all, an investment strategy can only work if you can stick to it. Many people find that doing so is much harder than it seems.
Most people have a strong urge to cut their losses and get out of the market when they suffer a loss, even when the loss is relatively small. The problem is that almost every successful strategy will see occasional losses, and giving up means that they never get a chance to make gains. Some investors have a similar problem when one part of their portfolio improves and they are tempted to put everything they have into that part. That is incredibly risky, since it can lead to huge losses if that investment loses value.
The solution is simple. Make a point of stopping, thinking, and researching before making any decisions. Be wary of trusting your first impressions or gut instincts until you can take the time to verify them.
The anchoring bias causes people to cling to the first piece of information that they hear about a topic. It is natural to think of the first price that you hear as fair, or to base investing decisions on the first bits of information that you get. That can stop investors from adapting as the market changes.
Good investors learn to be flexible and accept new information as it comes. Take the time to verify everything, but be ready to change your mind when you determine that it is true. That is often easier said than done, but it will get easier over time if you make an effort to be honest with yourself. It can also help to try to prove your own ideas wrong so you can get used to doubting your own ideas.
Studies have shown that people who can delay their gratification tend to be more successful in life. In the case of investing, that means it is important to resist the temptation of chasing immediate gains. Getting a sudden windfall feels great, so people tend to seek them out, but that is almost a form of gambling. The best investment strategies take place over fairly long periods of time.
Investors need patience to use those strategies, and it can be hard to learn that patience. Mental exercises can help. Put yourself in situations where you can have a little bit of something that you like immediately, or have more of it if you wait. Force yourself to wait, and increase the waiting period over time as you get better at waiting.
Davenport Laroche is a leading shipping container investment agency based out of Hong Kong.