The psychology of investing

Last week, I wrote a post about portfolio management and signalled my intention to cover some of the elements in more detail in further posts. Since then, I’ve been thinking about the psychological aspects of investing – I’ve written fairly extensively about the qualitative and quantitative analysis I do on companies, but relatively little about the mental traits I feel are important for being a successful investor.

  1. Being calm and unemotional. Pick up the average paper or turn on a new channel and prepare to panic. Over the last twelve months, I’ve seen articles talking about the downfall of the UK thanks to Brexit, the threat of Corbynism, how the Conservatives are going to destroy the country, how the Coronavirus is going to turn into a global pandemic that wipes us out and further histrionic nonsense. My advice; keep away from it from it all when it comes to investing. Avoid excitement and speculation – if your personality craves these then you may not be well suited to investing. One way to combat the adrenaline cravings is to invest using a process – develop some rules and stick to them.
  2. Not being greedy. You will never, ever sell at the top and buy at the bottom with every investment you make. It’s impossible. The sooner you accept this and move on with developing your strategy, the better off you will be. If you feel yourself starting to get greedy “just another 10%”, sell and move on.
  3. Not being overly scared. See point 1. Listening to that rubbish on a daily (or hourly basis) is only guaranteed to stoke needless anxieties and panic, neither of which are conducive to considered, strategic investing.
  4. Being patient. Avoid making quick decisions. Those that know me well will probably splutter at that; “come on, let’s make a decision and go with it” is usually my refrain, but I am also a big believer in having the facts to make an informed decision. If you need to rush to make an investment then you’re probably sticking your leg straight into a bear trap. Stop, calm down and think about it. If it’s really a great opportunity then it will still be here tomorrow.
  5. Understanding your limitations. There’s an irritating tendency today for people to act like a guru and ‘fake it until they make it’. In some ways, a bit of confidence is a good thing, but don’t fall for your own hype. What makes you so different from the thousands of other investors in the market? What are your weak spots and what have you done to guard against them? Are you playing to your advantages and how do you know they’re better than the competition? Are you in possession of all the relevant and accurate facts and if so, can you make sense of them?
  6. Being realistic. You might read about Warren Buffet and think “I could do that” but the truth is that Warren is the outlier, not the rule. You’re not going to double your money every year and you’re not going to pick winners every week. Accept it and move on. I aim for an annual compounding rate of 10-15% and consider that an almighty challenge at the best of times. Having said that, if I can compound my money at 10% a year for 20 years, that will soon add up to some serious cash.
  7. Control what you can and don’t worry about the rest. You can’t do anything about what the market thinks or feels about a position hour to hour or day to day. It might feel frustrating to watch your ‘favourite’ sliding backward but if you’ve done your due diligence then have faith that it will be rewarded in time. Focus on your buy price, your position size, portfolio construction and how to bank profits – clear your mind of the noise.
  8. Always seeking new ideas and how to apply them. My fiancée knows that I enjoy my creature comforts and that shopping is rarely one of them. Fortunately, she’s discovered that a good way to tempt me out of my lair is finding a good bookshop I can nose around. Never stop learning! As a species, we have access to more knowledge and understanding about the world than anyone before us; make use of it!

Of course, writing these is much easier than really living them and all come with a caveat; enjoy your life as much as you can – you only have one! So many people I know develop a ‘victim’ mentality where they convince themselves they’re helpless to change, are overruled and overpowered by past mistakes or current circumstances. If you’re not happy with something in your life, then make a plan to stop it and set a deadline – then make it happen. Life is far, far too short for daily misery!

Spend some time each day considering these tactics and how you can apply them. Consider how you will overcome the natural challenges that will occur and focus on implementing them. You will inevitably slip backwards at times – I’m guilty of forgetting them more than once – but persistence and perseverance will help to embed them in your behaviour as second nature.