Investor Psychology

 INVESTOR PSYCHOLOGY

The aspect of Investor psychology is deeply undermined by a majority of people as an important factor to be considered when making or managing an investment. Even when this is one of the prime sectors to be taken care of- in terms of preparing for difficult times when the returns for the investment might be low. This is where an investor needs to be able to control the way they make a decision in that period of time. After all, Investment is only 10% technicals and 90% psychology!

    First up is the most overpowering emotion that arises in each and every investor is also the one that has led to every impulsive decision an investor has ever made during a bear market or correction- FEAR. It is the part of a very basic human survival psychology that has also been explained by Tony Robbins in his book- Unshakeable, and can have long term damaging effects on an investor’s portfolio.

    The thing about fear is that it is the most brutal when it overcomes the logical side of that person. One of the biggest examples is the global financial crisis of 2009 where every investor in the world was exiting the market like running for their lives. The same scenario was repeated during 2020, after the outburst of the global pandemic of COVID-19 when in India, the Sensex dropped from 42,273 points to 28,288 points within a week! This is when the panic was felt by everyone invested into the stock market. However, if investors would have invested more capital in the stock market during that period into fundamentally strong companies, they would have made once-in-a-lifetime returns over a very short period as few months after the crash, the markets soared!

    The problem is that investors did not realize that this was when they were getting wonderful companies at low prices! This is where they lost the game. Even certain investors that knew about this strategy at the time being did not really take action according to it, but rather took action against it with the simple escape excuse of “This market crash is different”.

    The next part of Investor psychology 101 is BLINDED TRUST. Have you ever had a friend or perhaps a relative tell you stories about how they minted exorbitant amounts of money from a particular stock or investment? Well, let me tell you that only because someone was able to make the best of the timings from a stock does not mean that you are also bound to have the same timing. Infact, the chances of you losing your money or growing them at a low rate of return is much higher in this case. Some also end up losing money by trusting in their own brokers. How is that possible, you ask? As we know that one of the main mediums of income for a broker is the commission they receive after making a sale to an investor, how can you be so sure that the recommendations they make are going to be in line with your interest rather than theirs? Therefore, the only person you should trust is yourself, not on the basis of your feelings about an investment, but the research you do about the fundamentals of that business.

    Moving forward, we have- GREED. This is where the suggestion of the stock that made your friend lots of money begins to feel like a good idea. It is utmost important to understand that the concept of making “Fast Money” is a lie, and the only high-return and low-risk investments you are likely to get are the long-term and sustainable ones. 

    Now that we know about the 3 key investor psychology parts, it is time to understand how we can overcome these emotions and go beyond fear, blinded trust and greed.

    The first solution to these emotions is as valuable as treasure for an investor. It is the first factor needed to be in place for the magic of compounding to work and that is- PATIENCE.

    Patience is very important when one is investing because of the time it allows the investment to have leading to more powerful compounding. It is also what helps you get over the feeling of greed as in that way you will be truly committed to your previous long term investments and not make haphazard purchases just due to some sort of a suggestion from a friend, colleague or broker. This also reduces the possibility of you making a loss as you would be patient enough to not sell when there is a downturn in the market, which will help you wait till the investment is at its best and will give you the highest returns possible.

    Next is KNOWLEDGE ENHANCEMENT. When an investor is well versed with knowledge regarding their investments, they are more likely to make decisions that will be more lucrative for them. Right from how the stock market works to the analysis of annual reports of companies that are potential investments. This way, when you have gone through the fundamentals of the business yourself, you are more confident during bear markets that the investment will not only survive through difficult periods but also grow better once those market downturns come to an end. It is also the solution to blind trust as you will be aware of the criterias that an investment needs to pass for you to add it to your portfolio.

 

   Last but not the least we have DISCIPLINE. This is one of the most important guidelines an investor should follow. Reason being that without a certain series of questions you ask and guidelines you set, your portfolio would change its strategy every now and then, that in turn will reduce the chances of maximizing returns. After all, how will all the other factors fall into place if there is a lack of consistent approach?

    So this is how you can overcome all the things that are holding you back as an investor namely- fear, blind trust and greed with patience, knowledge enhancement and discipline. Now are you ready to go past the investor psychology with just 3 simple habits?

~Shagun Johrii

FIVERR