Posted this on the cfd thread..mental state of investing for newbies!!
This post was done purely to help newbies from a psychological / mental point of view for investing and trading...had no reference to any one share or any person on this thread..
But if your read it carefully you will pick up a lot of resemblances to the PS thread????
Not posting any cfd charts this weekend but would like to focus on the mental state of investing/trading .
For some maybe not as fun as analyzing the charts but in my opinion far more important.Some here may have heard that as humans we are not wired to be good investors. As a matter of fact , due to being such emotional creatures being rules by fear , panic and greed....The Markets extreme volatility is our own behavior of uncertainty , acting on emotions , gambling and being totally irrational.
In investing you are your own worst enemy. IMO unprofitable investors are easily spotted by a number or traits which i will discuss / explain later.
Why is what im doing here / showing usefull? Well one of the ways to become profitable is to find a very few successful ones and learn from them.
One of the most important traits of a successful investor/ trader who is consistently profitable is that he possesses the ability to think in the opposite extremities. Basically a bipolar analysis . Why is this important?
1.F Scott Fitzgerald once said " The test of a first rate intelligence is the ability to hold 2 opposite ideas in the mind at the same time and still retain the ability to function"
2. Another strong quote in the field on investing that is used often by very consistent investors is " Strong Opinions , weakly held"
So many investors have downfalls because they believe the narrative and fall in love with their analysis. When newbies speculate in assets like the shares or cryptocurrencies you will rarely see " the ability to hold two opposed ideas" from such investors. same could be said of those investors chasing super high growth shares or investing in the next Silcon valley startup.
They are part of a cult . True believers who will never ever bother analyzing the other side of the bet.
Another undesired trait in the field of investing is the so called " Illusion of validity" Basically everywhere you look , you only see what want to see. . No matter what is going on , they spin a positive bullish view. And of cos yes , its business for them . Positive news attract more attention and attention in social media = income ( advertising etc. This is their job ( seeking alpha comes to mind)
However as a newbie investor , you have to have an open mind . You should not fall into a perma bull nor perma bear state.
During every expansionary period there are plenty of reasons to worry. This is why they say markets climb on a wall of worry. Worrying is fine but entering a state of perma siding , the illusion of validity , or in plain simple english ...only seeing negativity in a bull market or vise versa , this could be very hazardous to your state of mind. For the newbies it could even mean NEVER reach profitability.
Moving along , another sign of an inexperienced investors or newbie is when you see them talking up their book. They fall in love with this so called fast growing company they own or precious metal or digital currency and they believe it has better technology or growth than any of the others. This refers to the term " Strong Opinions weakly held"
D0 not fall in love with any of your investments , precious metals or crptos. These investments will never love you back. Only and only believe in the story and narrative for as long as the price moves in the right direction. But when the bull market ends , or liquidation occurs , and when judgement day arrives as it has during all the previous cycles , the market darlings always disappoint you the most!!!!!
Those who fall in love with their investment book and forget about that RISK MANAGEMENT is more important than LOVE , they will be the most heart broken.
Another factor or mindset hazardous to your success and profitability is anchoring or single factor decision making. In plain English one piece of information that you have a bias towards and you let it effect your total decision making.....instead of taking onboard everything in front of you.
The their is the bias blind spot. This happens with more advanced investors. Simple example here.. You may investors here who have been correctly bullish during the bull market. They will then taunt the perma bears , laugh at them , poke fun at their research and totally ignore what the bears have to say. That works until it doesnt and when judgement day arrives for the bull market , bears will have the last laugh. Basically these bears who are quite smart have been consistently wrong during the bull market , the person ( bull)who suffers from bias blind spot will eventually fail to heed the important message from the bear research or advise. hence when investing keep an open mind at all times.
In group bias is another form of not having the ability to entertain both sides of the coin, bipolar thinking and being open minded. eg the group of friends you keep or a particular forum you post in or the people you follow on twitter may all follow and talk the same share , indexes crypto etc
My advise is to follow as many people who you disagree with , that you also follow who you agree with.Make your social media or forum feed balanced . You dont need so called " YES MEN" around you giving you confirmation bias all the time.
Let someone experienced challenge your book and narratives you hold , the investment themes and ideas that think you will florish forever ( probably wont). So its very healthy to see the other side fo the argument.
Your job as an investor/trader is not to be right but to be PROFITABLE. Those people who you disagree with will help you apply risk management juts in case they are right and you are wrong. After all the primary job of an investor or trader is NEVER to lose money . Just ask Mr Buffet
Then you have the curse of knowledge or the so super IQ. You have people who think they are so smart they think they can beat the market and outsmart it . Always remember the old saying on wall street " Markets are never wrong , people often are". The curse of knowledge is apparent with those who come from other high level professions and have been tasked with becoming profitable in the game of investing/trading where markets and things are not rational and are based on emotions of fear and greed!!! Dentists , surgeons , doctors , mathematicians , lawyers , inventors and your everyday genius tend to have this curse go against then very very frequently. Furthermore we have seen some of the smartest hedge fund managers blow up their accounts betting against recessions , betting against countries like china or japan , betting against weather etc..Majority of them fail at investing.
to be continue ...
Then we have expectations vs reality...Social media , forums etc is like posting illusions of how things should be. What you do in private will get the recognition public. Its about time and effort. Many people underestimate the amount of time and effort that it takes to be a good investor/trader. Social media and forums are a double edged sword. One group will make success or being profitable look easy while others will really dsiplay what it takes. Do yourself a big favour and follow the right people for a real look.
Ill quote my previous advise here from another thread :
"Don't ever get discouraged by other peoples success, no one is showing their failures online unless they posting their actual trades..!!!! "
And then every investor/ trader will eventually go through some wining streak . Sometimes it will feel as if whatever we touch turns to gold. For the experienced investor/trader , they will understand where this phrase comes from and goes , so they wont be phased much. However for the newbies , they will enter what i call the overconfidence effect. They think they are the chosen ones..There system of picking stocks , their timing , their strategy and asset allocation model is far superior. They will claim they have got the holy grail.
These hot streaks as i call is usually apparent when they are trading on the right side of the trend ( bull in a rising bull market)...unlike catching tops and bottoms ....wont last forever. The moment the market changes direction, their total inexperience in bear markets blows thier accounts and turns them away from trading/investing all together. The recent bias has been a full blown bull market going on and on. The newbies having entered into this system with a view that what has worked recently has always worked throughout history and will continue to do well in the future. However experience is important . Events that may not have occurred in our lifetime may suddenly appear again. So it is very important to learn from history.
Those who cannot learn from history are doomed to repeat it! Note thier have been 3 important stock market crashes from 1984 to 2008 with a fully blown bear market around 2006. very few here would have experienced this as im talking to newbies here.
That should be about it..I hope sharing some of my knowledge and own experiences in the investment/trading game helps you become better traders/investors
We are our own worst enemy. So maybe the important questions in investing is not about what is the valuation ? What is net asset value? is the trend bearish or bullish? Whats the target after the breakout? What wave are we on following EW? BUT how well do you really understand yourself? How well can you control your emotions?
In my mind at all times....
1. no falling in love with a story , narrative, investment theme ....
2. having a conviction and strong opinions but holding them as a weak hand ...
3.not being a perma anything...
4. not trusting a single factor or having a bias towards one data...
5. being mindful of the way research analysis frame their ideas and mislead us...
6. making sure i dont have a blind sport.... best done by reading material of those who you disagree with which makesit very healthy in decision making.
7. not being part of any one group ...gold bugs, hedge fund wannabees , failed investors turned philosophers, yes group threads/forums, if , but ,hope and Waiters groups, groups that mislead , change wave counts to suit their opinions , groups that insult, name call and character assassinate any alternative views, after the event groups showing winning trades etc...
Finally ill repeat again.....You are your worst enemy.Your job as an investor/trader is not to be right, but to make money and be profitable!!!!!!!