The Psychology of Investing

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In the psychology of investing, very little is said about how different investment styles suit different personalities. When I think about my own investment history, I’ve tried almost everything possible, and different styles have caused different feelings. Gradually, I’ve come to realize that, for example, trading doesn’t suit my personality at all, and similarly, startup investing (or investing in very small growth companies) has caused stress.

Perhaps it’s time to move from discussing the superiority of different investment styles to the suitability of different investment styles for each investor’s personality. When one finds the style that best suits them, they commit to it and learn its most important features out of genuine interest, not out of obligation. And through that, the results also improve.

For example, for a person who is fast-paced in life and enjoys games, index investing can be very unmotivating, whereas trading might be the important thing. For a somewhat lazy and comfort-loving person (like me), quality investing can be a good option. For a person who is not particularly interested in investing, index investing can clearly be the best solution. (In addition, the investor’s age and previous experience naturally have some influence.)

The most important thing in investing is to find a strategy that one can live with during both good and bad times. (Even index investing can be a bad option if one loses their nerve in a severe bear market and realizes losses and stops investing). An investor’s biggest enemy is not a stock market crash, but the investor’s own mind.

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Indeed, there might be some truth to that when I start thinking about the matter from my own perspective.

For example, I am an introvert, so one could think that I don’t want to “socialize” too much, i.e., follow others or copy the contents of model portfolios (tested and proven ineffective).

I usually keep my opinions to myself and don’t overthink things, meaning I don’t comment on the figures or future prospects of the companies I own, but rather just focus on investing long-term (it has gone quite well).

I am also stress-free, moderate, unhurried, and calm, so trading and lottery tickets can be forgotten, and index funds can be loved (as the bedrock of my portfolio now and always).

My taste in women is a non-smoking, subtly made-up, untattooed, neutral, and natural girl-next-door type of woman, meaning Finnish steadily boring blue-chip stocks are most pleasing to the eye. Therefore, all sorts of unsexy, rollercoaster-ride-like speculative stocks can be forgotten (women suitable for my taste are becoming scarce in this country, which is a pity).

The list could be continued much further, but one could say that my investment portfolio reflects my character and values, more or less. Initially, it sought its direction, but then it settled into its current state.

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Has starting systematic investing and sticking to an investment plan strengthened mind control generally in other areas of life for others as well?

For me, starting to invest, creating a precise plan, and sticking to it, opened up some kind of locked thinking “achievement” in my brain, thanks to which my decision-making has generally become more sensible and rational, refusing cravings became very easy, and I even think about things differently now than before I started investing. Sometimes it feels like I have become wiser and more mature throughout my investment career, noticing it in everyday life.

For example, I can easily refuse treats nowadays, even so effectively that I completely gave up products from the candy and soda shelves, because suddenly I am capable of it, meaning there was never any sugar addiction, but it’s about desired systematic planning. I also changed my diet on the fly towards a healthier direction effortlessly, due to a systematic willpower and decision.

This is similar refusal to that at the stock market’s own share shelf, where there are no problems or pangs of conscience in refusing hyped “sure winners” or reviled “eternal laggards,” when these choices are not guided by external factors, but by my own mind.

I am no longer swayed or talked around by anyone’s sales pitches; even before I started investing, that was sometimes possible in different areas of life. I have made a permanent break from herd behavior both in investing and outside of it. I have become more and more a deep thinker, observing the world and its goings-on with new eyes, while still keeping my opinions to myself.

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In investing, all kinds of opportunities and offers arise daily. As an investor, I have learned to say “NO” to almost everything, otherwise life would be constant trading and switching investment targets. This has spread to other areas of my life too; it’s easy and natural for me to say “NO”. It surprisingly improves the quality of life when you can relax, not care about trends, fashions, and the constant flood of stimuli.

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Following up on the previous, my friends occasionally ask me for opinions related to stocks. Lately, AI has started to interest many as an investment, and I’ve received questions about it. My answer to these is that a) I see signs of a bubble but haven’t delved very deeply into the topic, and b) I invest in something other than this sector.

My answers cause disappointment; somehow people find it hard to understand how I can be quite indifferent and uninformed about the matter. It’s not a problem for me if someone makes money with assets I don’t invest in myself. Nor is it a problem for me that I don’t understand most of the world’s companies. It’s certainly nice to learn new things and broaden one’s general knowledge, but in investing, the amount of information is too vast for one person. One simply has to limit it strictly.

So, I let others get rich with crypto, gold, AI, etc., and I focus on my own matters. It’s enough for me that I know what I invest in and believe in my strategy; returns come irregularly and at times divergent from the market.

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Good writing, I’m on the same page myself. I invest boringly, or should I say, boringly surely, and when asked about my investment choices, I don’t like to, or rather, don’t even bother to comment on them much further. Ultimately, they just follow a long-term investment plan that matches my experience-verified risk level, nothing more special or strange, but simply justified this way.

My brother sometimes asks if I’m already investing in AI and if I have any cryptos yet. When I tell him that neither suits my investment plan and AI is at most indirectly through index funds, and I haven’t delved into AI any further than making funny pictures that make me chuckle shyly, I mostly get “aha” as a response, meaning it’s clear the topic won’t be continued, which is perfectly fine.

It’s peculiar, though, if some people consider it indifferent or ignorant if a certain hyped investment or company isn’t even at least being followed in investing. One must understand that not everyone is interested in everything that is constantly on most people’s lips, in comments, and social media updates. When it comes to food, I’m omnivorous, but in the world of investing, I’m happy to be picky if it supports my investment plan in the way I desire.

Everyone will surely find something in the investment world, and it doesn’t necessarily have to be AI, cryptos, individual companies, or other such targets that are constantly in the spotlight and headlines. The most important thing is to invest with reason, not emotion.

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Wise thoughts in the couple of previous posts. And also on the same page with these thoughts.

Furthermore, when adding that I can accept that the future is very uncertain and all investments contain risks to a greater or lesser extent. Diversification is a sensible (and at least somewhat effective) way to manage these risks. Internalizing this, at least for me, helps me sleep better at night (ok, I also think through real horror scenarios and by reading literature, one can try to understand their effects).

And then also that all mistakes are my own and successes have relatively little to do with my decisions.

I, however, find economics interesting on a general level and find it fascinating to ponder the impact of various things and phenomena on society. So I might also delve a bit deeper into at least some of the details to gain a better understanding. But this is more about curiosity and to some extent just my way of perceiving the surrounding reality. So not because of investments, but despite them.

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Investment Course at School

Sometimes I come across discussions where there’s a call for more investment education in schools.

This week, I received a request from students (2nd-year high school students) to establish an Investment Club at school. I talked to the students, and there’s indeed interest in the secrets of stock investing.

I’ve thought about it sometimes but haven’t gotten around to organizing it. Now, however, I’m considering it a bit more, as the initiative came from the students, and funding could also be arranged, so perhaps I could lead one. I even have a rough outline for a course plan in mind.

Here (in Lux) and especially in our school, the school organizes all sorts of extra activities for students: School newspaper, TedXEdu course, a few entrepreneurship projects, to name a few. Almost every week there’s some event, plus there are weekly courses. These events are even so numerous that some people have given up their hobbies so they can focus on school activities.

In my opinion, these courses are a great phenomenon in the sense that they develop civic activism and various important skills. Many students have already started creating CVs with their help, for example, by creating profiles on LinkedIn to showcase their expertise. In addition, certificates are awarded for these activities.

Many students in our international school have recently moved to the country and therefore do not have a social network. These courses offer a solution for them to find like-minded people.

I also see weaknesses in this. I think it would be important for young people to learn to operate in different environments, meeting different young people and adults. Our school has 1500 students and dozens of nationalities, so there is certainly diversity. Still, I wonder if it is ultimately the school’s job to provide all services for young people?

I’ve started to wonder if it’s the right attitude for students to immediately call on the school to quench their thirst for knowledge, or if it would be important to learn to find services outside their own bubble? Especially here in Luxembourg, one would think there are enough people knowledgeable about investing. I’m not sure about offerings targeted at young people. Perhaps there could be a market niche here.

What does the forum think?

  • Just set up an investment course
  • No courses at all. Encourage self-reliance!
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Ps. The topic of the last session would naturally be “How to beat the market with Hesuli small caps”

Absolutely, lynching will naturally be an essential part of the course.

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I would have answered that both options, if possible.

So, by all means, create the course. One could think of it as an investment with a certain optionality.

And could one consider having some kind of exercise at the end of the course, such as getting to know a company related to the local stock exchange through interviews etc. for those interested, and then some kind of presentation or similar?

So they could, as it were, apply their learnings a little, and one would believe that companies there would be interested in supporting this in some way?

Of course, many details would still need to be considered, but just as an idea..

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As a long-term investor, and especially having grown capital through FOMO, I somewhat disagree on how the investment scene should be positioned. As usual, investment ideas can be implemented in thousands of different ways. That’s why I don’t see this as a way to teach juniors in a ‘do it this way’ manner. But, if you want to traditionally equalize this too, as is traditionally brainwashed in Finland, then Ok.

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I don’t see this as an either/or situation. The course doesn’t have to provide everything pre-digested or as facts; instead, it could be more guiding and activity that feeds one’s own thoughts.

The course could cover basic things, and assignments would guide students towards independent work. Students could spar their ideas in ‘Investment club’ meetings, where it would be good for the lecturer to participate occasionally, e.g., once a month.

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Charlie Munger: The Mind is a Fortress – Why is it So Hard to Change Your Mind?

Legendary investor and Warren Buffett’s long-time business partner Charlie Munger gave a famous speech in 1995 titled The Psychology of Human Misjudgment. In his speech, Munger broke down the cognitive biases of the human mind that lead to poor decisions. One of these biases is the Inconsistency-Avoidance Tendency, or the tendency to avoid inconsistency.

These biases are not just harmless habits, but deep-coded biological mechanisms that guide almost all of our actions, from relationships to investing. That is why becoming aware of and recognizing them is important.

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Investment psychology is discussed far too little, so I’m posting this video here as well, where @Karo_Hamalainen and Riku Pennanen talk about the subject :slight_smile:

“Even if the analysis were perfect, results can easily remain elusive if one’s own behavior messes it up. Many know in theory what they should do – but are unable to do it in practice,” says Riku Pennanen, head teacher of the Quality Investing School from Sifter.

In the final episode of Karo’s Grill and Sifter’s joint four-part Quality Investing School, the discussion focuses on investment psychology and the typical mistakes investors fall into.

If you can eliminate the worst mistakes from your own behavior, logically it should be an easy way to improve investment returns. The father of value investing and idol of the young Warren Buffett, Benjamin Graham, said that the investor’s chief problem—and even his worst enemy—is the investor himself, meaning his own actions.

One of the typical mistakes is selling a good company too early and staying in bad companies for too long. The classic investment advice seeks to tackle this: “Cut your losses, let your profits run.”

“Even though the advice sounds easy, it is difficult to follow. According to studies, a loss feels worse to a person than a corresponding gain feels good. In other words, we react to losses emotionally much more strongly than to gains,” says Riku Pennanen.

A quality investor could be thought to be protected from some common investment errors. Quality investing—buying high-quality businesses and owning them long-term—is well-suited to shifting attention away from the share price, and it is precisely share price changes and swings in market sentiment that are prone to causing expensive behavioral errors for investors.

“A long-term quality investor buys business results, not share price movements. Price volatility is inevitable, but in the long run, the direction of earnings growth is what matters,” Pennanen reminds.

Topics:

0:00 Start 1:35 The biggest investment mistake of Finns 3:33 Market return vs. investor return 4:46 Selling too early 16:04 Fear of buying high 26:50 FOMO, i.e., fear of missing out 29:47 Hype cycles 39:05 Short-term thinking 39:39 Catching falling knives 51:44 Episode summary

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I thought I’d write a short text about the psychology of investing. Mainly about the phenomena and thoughts that cross my mind from time to time while investing. These have surely been discussed before.

One thing I struggle with is the “inability” to maintain a cash reserve. Somehow, I strangely start to feel anxious if all my money isn’t “working” for me in investments. Even if I’ve thought it through and concluded that now might be a good time to keep at least a few percent in cash for future purchases, I always end up buying something within the next few days. That anxiety just weighs so heavily in the back of my mind. Perhaps there’s FOMO behind this, a strong action bias—the need to do something—even when it might be better to just wait.

Another is a pointless feeling of failure, which can be completely unnecessary and often stems from the success of others. Envy can also get mixed in here. For example, if I’ve gained 20% YTD, but an acquaintance has made 100% by buying Bittium and brags about it quite a bit, I almost inevitably get the feeling of “dammit, why didn’t I buy Bittium so I could have gotten that 100% return too?” Even though the friend’s success takes nothing away from me personally. But thoughts of envy and failure creep in nonetheless. And maybe regret over missed gains, the so-called “what if” game. Of course, survivorship bias plays a role here: those who get a 100% return on Bittium talk about it out loud, but they go quiet if their portfolio melts by 50%.

Thirdly, the “compulsion to buy the dip” occasionally comes to mind. Or catching a falling knife. In my case, this might be driven by some kind of confirmation bias—that my own assessment is correct (anchoring to the price). Let’s say I estimate that stock X is already really cheap and that the market is overreacting to the downside. I buy the stock. Then the decline continues and continues, and I buy more every day. Even though logic says I should probably just wait until the fall stops? The decline could still continue for another 50%, even if I were “right” about the valuation. In such a situation, a “compulsive” feeling to buy the dip easily arises. A natural need for loss aversion kicks in. This feeling is satisfied by buying the dip to try and fix the situation.

I’ll mention a fourth one, which is impatience. I’ve occasionally recommended stocks to my spouse, and she usually buys them a bit late, about a month after my recommendation. She hardly ever wants to sell. Take Konecranes and Wärtsilä as examples. I recommended it sometime in 2021, and she bought it at around €34. I sold my Konecranes a long time ago; my spouse didn’t want to sell even though I “recommended” it. Well, since then, Konecranes has risen to €102. I was impatient and missed out on good returns. My spouse had the patience to “hold” the stock much longer than I did.

ps. On the other hand, luckily she sold all the Konecranes now (on my recommendation!) while the price was still over €100.

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Over on Sijoitustieto, there is once again a good post by the handle Almanakka:

Legendary investor and the late Vice Chairman of Berkshire Hathaway, Charlie Munger, was known not only for his investment expertise but also for his deep understanding of the human mind. In his famous speech The Psychology of Human Misjudgment (1995), he listed 25 cognitive biases that lead us astray. One of these – and according to Munger, perhaps the most foolish – is the Envy/Jealousy Tendency.

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