The Value Investor’s Psychology

Here at Value Investing Philippines, we want to educate more people about the advantages of investing with emphasis on value. But this strategy of investing is just a small part of a big equation. If you’re going to read all through this blog and all its lessons, and if there’s one thing that you should be reading, its this topic. I’m talking about Psychology.

Value investing is not just a business. Its a game. A competitive game. And though you may think that you are playing against other people, traders, institutions and other investors, the big part of this game is played against yourself.

There are lot of great investors out there who win in investing contests where we use virtual money. And there are a lot more people who invest using demo accounts, but they lose when its time to invest with real money. The reason for that is emotion.

Emotion can be a good thing. And it could be a bad thing too. And its true that emotion plays a large part in investing. Warren Buffett said that you don’t need a high IQ in investing, you just have the right temperament. What is he talking about temperament? He means how you manage your emotions. Its all about psychology.

Look at it this way. When people invest using virtual money, they feel relaxed. They don’t have to feel fear or greed. Because its all make believe. Its play money. They can also be aggressive and if you lose money, you just have to reset and you got all your money back from the start. But in real life, greed and fear runs around like a thief in the night. Always watching for the right opportunity to strike. When you made an investment and the stock went up, greed sets in. “Hey, I made the right investment. I think we should put in more money.” Since the price doesn’t go up in a straight line, the price went down and now your portfolio is in the red. Now, fear sets in. “Shall I sell? Shall I add more?” This rollercoaster of emotions shuts off the rational part of the brain to make good decisions. And this is where the investor lose money. The investor double down on the money and the stock went further down. Feeling more afraid, he sold his shares at a large loss and then stock went up. Devastating isn’t it?

This story is not a unique one. Psychology plays a large part of the game. Its a game against yourself. If you know that a stock is a good buy, being early and being wrong feels like the same thing. And when you invest in a stock and it went up, it doesn’t mean you are right. It could just be the randomness of the market or you just got lucky. There is a lot of uncertainty in the game. There’s a lot of emotional rollercoaster to manage and what separates a good investor to the great investor is how well he can manage those emotions, how well he can react under pressure, and how clearly can he think when everybody else and the whole world thinks that you might be wrong. How else would you know that you’re right? Who’s gonna tell you?

The answer to that my friend, is in the mirror. You must always question yourself if you’re right. If the stock that you bought is going up, it does not mean you are right. Same goes when the stock goes down does not mean you are wrong. Have the knowledge to know and the clarity to self assess yourself. Have the conviction that you’re right and the self-doubt that you might be wrong at the same time. That is hard. Very hard.

But… That’s the truth. You won’t be a better investor without realising that. And without knowing how to fix that within yourself, you’re like driving blind.

One comment

  1. I spend months analyzing a company’s fundamentals before I finally hit the buy button. But after buying the company, I still doubt my decision. So I review my analysis to convince myself that I made the right decision.

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