[This is the first in two-part series on investing and investor psychology.]
Investing is no different from any other worthwhile endeavor. Doing it well requires an understanding, and preferably a mastery, of fundamentals. It also requires the application of techniques and a control of emotions that maximize opportunities and minimize mistakes.
Investing is not unlike playing baseball or the piano. Many of us have done one or the other or both. We learned the basics, practiced a little or a lot and probably played in more games or recitals than we can remember. But most of us weren’t willing to do what it takes to be really good at it.
Those who are successful not only have the fundamentals down cold. They know and use techniques available to improve their investment skills. They rarely make big mistakes. But when they do, they don’t let it throw them off. They adjust and recover quickly.
Most people who try their hand at investing are too lazy to learn the basics, let alone advanced techniques. Many just want to make a quick buck. This is about as easy to do in the markets as making it to the big leagues in baseball. From time to time the market becomes “easy” and investors can make no mistakes. These “easy” periods (such as the ones leading up to the Dotcom and 2008 financial crisis) come about every 25 to 50 years and give investors a false sense of security. It is during these times when the psychology of greed takes over and investors drop their guards — right at the wrong time.
Just as a sport or music, most investors are amateurs. They are engaging in an unfamiliar activity outside their field. When they make a move, it can often be wrong. This is especially true at critical junctures when emotions are running high and the outlook is most confusing. It is at times like these that the market has a knack for operating contrary to mass opinion.
An ongoing challenge for the savvy investor, then, is to recognize such opportunities and act accordingly. Accordingly, in this case, it means contrary to the actions of the masses. But how is this done? How do you determine when the masses are wrong at the wrong time?
Most professional investors use about a dozen barometers that have proved remarkably reliable in gauging mass opinion. These indicators are designed to get a good feel for the psychology of the market. Come back next week for the rest of the story.
Quote of the week: “A great deal of knowledge, which is not capable of making a man wise, has a natural tendency to make him vain and arrogant.” — Joseph Addison
Bart Ward is the chief executive officer of Ward & Co. Ltd., an Anoka-based registered investment adviser – specializing in the management of stock and bond portfolios in companies which are listed on the NYSE.