The best trick in investment psychology is learning to do nothing which may not work if you are a goalkeeper!

Aug 24, 2022 | Investing Psychology

The human brain is hard wired to be bad at investing and many people are bad investors because they make the mistake of feeling that they always have to be doing something. Investing is usually short term boring and long-term exciting which is not in keeping with how our brains like to work which is where our investment psychology has a big part to play.

Sometimes we feel like if we do nothing, we look silly and not putting in enough effort but many times it pays to do nothing. Take goalkeepers for example it’s been proven that goalkeepers are statistically likely to dive left or right. If you are a goalkeeper and you have to save a penalty in the World Cup final you can dive left, dive right or stay centre. Statistically penalties are divided equally from studies done which suggests if you stand still you will probably save 1 in 3 penalties.

However 94% of goalkeepers dive!…why?…. because they need to do something it’s called self-preservation as you can’t be seen to be doing nothing. The headlines will be “lazy goalkeeper”… “” terrible attitude” or “get that goalkeeper out of the club”. The penalty taker knows this only too well giving them a much better chance of scoring a penalty.

Attribution bias is common amongst new investors especially those that have started during a rampant bull market or picked a few lucky trades with no background knowledge. This bias states that we tend to over exaggerate our ability at many things in life.

We all think we are above average intelligence, better looking than average, we all believe we are good drivers. We all think we look young for our age and we all think we are better than we are…it’s called EGO and you must leave it at the door when it comes to investing.

To be a great investor you need to be comfortable with others making lots of money on investments that you would never make because you must be disciplined and you must know your own brain.

Even the very greatest brains like Sir Isaac Newton have fallen foul of being envious of others investments and then buying in at the top of the market. Newton bought into the doomed South seas company long after he had initially sold at a good profit and then watched his savings vanish. You must work hard to know your own brain and respect it and retain discipline at all times.

There is always noise….switch off from the constant noise as much as possible market forecasters are usually wrong and the best investors pay little notice of the day-to-day fluctuations and forecasts of so-called market experts. That’s not to say you shouldn’t be keeping well informed of major changes in trend that are obvious to you!

News can affect our actions in all walks of life a study found that 3000 people lost their lives in 9/11 but 2000 people lost their lives in the months after 9/11 as people were so scared to fly. They drove longer distances something they weren’t used to doing because they were focused on something very loud in the news that was unlikely to happen to them.

Wayne Gretzky the most famous ice hockey player of all time said “I focus on where the puck is going” which is how we must think about our investments they are pricing the future returns of the company not the here and now remember that!

Most investors won’t buy shares when the news is depressing and share prices are at lows but are happy to pile into the market at all-time highs something known as herd mentality. This again links very well to FOMO (the fear of missing out )ust like investors piled into bitcoin and meme stocks after Covid they learned nothing from Sir Isaac Newton all those years ago…history never repeats but it rhymes.

One of the greatest investors of our lifetime Stanley Druckenmiller bought millions at the very top of the market after many months out the market after thinking it was over valued. Druckenmiller got major FOMO and by his own admition caught the top of the market by about 20 minutes losing millions very quickly within a few days. When asked what he learnt Stanley was very honest in saying “Nothing I already knew what I was doing was wrong”. Druckenmiller was and still is a great money manager with great experience but it shows how the human brain can at times be our best friend and at times our worst enemy. At times it’s best to do nothing

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