Psychology of Investing 101

[steelpony10]

    My opinion only, new investors need to resist slipping into one of these traps for best results:

          www.investopedia.com/articles/investing/060513/avoid-these-common-investing-psychology-traps.asp

    Veteran investors may need a 12 step program.


     With experience your investment personality type may change unless your in a trap. Eventually you settle into a category like these:

           www.tytoncapital.com/projects/who-are-you-investor-personality-types/

      I think, hope anyway, I’ve progressed into an Individualist. I believe that took from 1978-1999. The statement “irrational exuberance” (trap #6) for some reason struck home. I started seeking what I say as a better way then relyng on markets so much.

[Fearchar]

These are excellent!

[Fearchar]

#3 Confirmation bias impresses me as almost funny.

Yes; obviously if you hang out at a Crypto board, you will find a bunch of people who agree that Crypto is wonderful.
In contrast, on this board, it's difficult to find more than 2 people that really agree on anything!

[steelpony10]

Fearchar ,

       I was editing as you placed your first post adding investing personality types. I find different personalities, languages and cultures make the world interesting.

        

[FD1000]

I have "new" ideas how not to fall in these traps.
Use very limited number of funds(up to 5), with wide range categories(SPY/VOO/VTI should be your major one). Avoid single stocks/stocks, and hardly trade.

[habsui]

Talking about confirmation bias..

[steadyeddy]

I can only recognize a trap after I have fallen into it. As long as the holdings are broadly diversified, in general, you would recover and grow if you simply leave the portfolio alone.

[Chahta]

Does Amazon fall into the #1 trap? Why or why not?

[steelpony10]

Chahta ,

         AMZN is the dominate company in online retailing and a player in cloud computing. Like MCD and AAPL, management is still innovating trying to drive earnings. It possesses all the traits a great long term single stock investment should have.

          I think trap #1 means having an emotional attachment to an investment. A trait usually attributed to something breathing not a thing. One also fears failure, is indecisive and just can’t admit a change is needed. 

          The mistake was not realizing without innovating, evolving, it was game over for Radio Shack. Poor quality management, which is not the case with AMZN yet. 

           Of course the long term future of an investment is unknown and the short term can never be known. I don’t understand why holding a well run major tech player with great future prospects could possibly be a trap. 

         

         

[FD1000]

Just because a company is innovative, it doesn't mean the stock will beat generic indexes, after all, the object is to make more money. While the easy buy and hold, no psychology SPY,QQQ made over 52% in 3 years, AMZN lost over 11%.

[colorado]

Seems investing decisions can vary significantly with age and objectives of the investor, especially during a period with major changes in the interest rate environment.

[mnfish]

From Trap#1 - "Imagine betting on a boxing match and choosing the fighter purely by who has thrown the most punches in their last five fights."

Imagine betting on a stock and choosing the company purely by who has the most sales in their last five quarters. Should you be concerned about Operating Income (AMZN down 51% YOY) Net Income (down 108% YOY), Free Cash Flow (negative)?
AWS sales up 20% YOY, Operating Income down 2% YOY

AMZN has very little competition in on-line sales and maybe that's due to no one else wants to lose money at it. Much different story with AWS competition. GOOG, MSFT, DropBox, Salesforce, Oracle, SAP, Alibaba just to name a few big players.

[gman57]

I think you have to look at the AMZN numbers with some context. They pulled forward massive income when everyone was home during Covid and had nothing to do but shop. Their numbers are just getting back to normal but it was such an increase that getting back to normal looks bad. Yes they probably ramped up too fast during that time and over hired, over build etc... I don't think they saw the demand as temporary so now they have to right size. They'll be fine in the long run.

[bb2]

What do people think about knowing your tendencies and dealing with them. ONE of my problems is I'm a glass half empty person. I over analyze and invariably conclude with a negative view. I do best when a thought pops into my head and I go to the laptop and act. I have no "process", so maybe that'd help. Maybe my analysis is just bad sometimes. Maybe the issue is that I'm at heart a value guy but I love growth. (No such thing as GARP? In a swoon, there is.) Another thing is that bull markets make me crazy. I love the big drops. Selling low is not my issue. I like a no-brainer. Mixed up investor here.

[richardsok]

I agree entirely on the investor pitfalls of biases, emotional attachments, behavioral patterns, fearful moments -- and have posted many times on the topic. If you are a first-rate security analyst, the problem of emotions and biases MIGHT solve itself. For the rest of us, I wrote my book on the theme of eliminating personal judgments entirely -- or as much as possible -- and trade entirely on probabilities via technical indicators. Such signals are much more efficacious when applied to low volatility assets.

Higher volatility assets with typically manic short term charts -- such as precious metals -- are particularly difficult to trade on technicals (as some of us on this forum have learned) but some assets like BRK/B and QUS, to name two, are very tradeable on signals alone.

Yeah, I know. I've been a repetitious "Johnny One-Note" for some time now.    But the investment difficulties caused by emotions and faulty judgments are on other minds than just my own.

Time to give it a rest, though.