Investor Psychology Quotes

Investing has the best results when you learn from nature.

Richard Feynman, the great physicist, once said, “Imagine how much harder physics would be if electrons had feelings.” Well, investors have feelings

Ultimately, Investing is about holistic ROI. It’s not about just owning stocks or crypto or flipping for quick income. When we talk about holistic ROI, we are looking at our long term profit, short term profit, income security, cash flow, social impact, environmental impact, spiritual impact, stability of the permaculture economy, and more. That’s how we see it at Mayflower-Plymouth.

Man’s imperfect, limited-capacity brain easily drifts into working with what’s easily available to it. And the brain can’t use what it can’t remember or when it’s blocked from recognizing because it’s heavily influenced by one or more psychological tendencies bearing strongly on it … the deep structure of the human mind requires that the way to full scope competency of virtually any kind is to learn it all to fluency—like it or not.

Every tree in every forest is participating in investment activities….. capital allocation, energy flow, resourcefulness, utilization, leverage, information distribution, growth, value creation, and ROI…. Nature is an economy, and every tree is an investor in that economy. Sometimes I just sit in my back yard, observe, and take notes.

Stock Traders are always trying to time the market. But an investor tends to be thinking bigger, more broadly, and more holistically.

The biggest investing errors come not from factors that are informational or analytical, but from those that are psychological. Investor

As investor Michael Batnick says, "some lessons have to be experienced before they can be understood." We are all victims, in different ways, to that truth.

Irrational exuberance is the psychological basis of a speculative bubble. I define a speculative bubble as a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increases and bringing in a larger and larger class of investors, who, despite doubts about the real value of an investment, are drawn to it partly through envy of others’ successes and partly through a gambler's excitement.

After spending years around investors and business leaders I’ve come to realize that someone else’s failure is usually attributed to bad decisions, while your own failures are usually chalked up to the dark side of risk.

We are not merely spectators of the world but investors in it,

More than 2,000 books are dedicated to how Warren Buffett built his fortune. Many of them are wonderful. But few pay enough attention to the simplest fact: Buffett’s fortune isn’t due to just being a good investor, but being a good investor since he was literally a child. As I write this Warren Buffett’s net worth is $84.5 billion. Of that, $84.2 billion was accumulated after his 50th birthday. $81.5 billion came after he qualified for Social Security, in his mid-60s. Warren Buffett is a phenomenal investor. But you miss a key point if you attach all of his success to investing acumen. The real key to his success is that he’s been a phenomenal investor for three quarters of a century. Had he started investing in his 30s and retired in his 60s, few people would have ever heard of him. Consider a little thought experiment. Buffett began serious investing when he was 10 years old. By the time he was 30 he had a net worth of $1 million, or $9.3 million adjusted for inflation.16 What if he was a more normal person, spending his teens and 20s exploring the world and finding his passion, and by age 30 his net worth was, say, $25,000? And let’s say he still went on to earn the extraordinary annual investment returns he’s been able to generate (22% annually), but quit investing and retired at age 60 to play golf and spend time with his grandkids. What would a rough estimate of his net worth be today? Not $84.5 billion. $11.9 million. 99.9% less than his actual net worth. Effectively all of Warren Buffett’s financial success can be tied to the financial base he built in his pubescent years and the longevity he maintained in his geriatric years. His skill is investing, but his secret is time. That’s how compounding works. Think of this another way. Buffett is the richest investor of all time. But he’s not actually the greatest—at least not when measured by average annual returns.

What I am proposing here is that you consistently bet on inconsistency. What I am asking you to do is bet unfailingly on the failures of human reason, which is a sure bet indeed. It is a painful thing to admit that education, intellect and willpower are inadequate to make you the type of investor you would like to be, but it’s not as painful as losing money.

The idea that a few things account for most results is not just true for companies in your investment portfolio. It’s also an important part of your own behavior as an investor.

Most active investors fail to realize that they are part of the crowd themselves. They are trying to beat the crowd while being the crowd.

Think a little differently from the herd and see things they can’t or won’t.

The best investors are masters of psychology: they buy up your mental real estate before you realize it’s for sale.

This tendency of overconfidence and poor outcomes is not confined to only retail investors. Institutional investors suffer from overconfidence equally if not more, and their investment results are not superior either.

In a bubble, people demonstrate some sort of cult-like behavior. They defend their positions, not by economic logic, but by force. They do this by calling those who disagree with them dirty, and mocking people who give them prudent advice.

The superior investor resists psychological excesses and thus refuses to participate in these swings. The vast majority of the highly superior investors I know are unemotional by nature. In fact, I believe their unemotional nature is one of the great contributors to their success.

Mother Nature convincingly suggests that those who stay scared and run with the herd are more likely to stay alive. As investors around you behave irrationally and the news describes a miasma that will last for years, it’s easy to lose sight of your well-laid plans. It’s tempting to join the herd…

Nassim Taleb writes in his book Fooled By Randomness: In Pharaonic Egypt … scribes tracked the high-water mark of the Nile and used it as an estimate for a future worst-case scenario. The same can be seen in the Fukushima nuclear reactor, which experienced a catastrophic failure in 2011 when a tsunami struck. It had been built to withstand the worst past historical earthquake, with the builders not imagining much worse—and not thinking that the worst past event had to be a surprise, as it had no precedent. This is not a failure of analysis. It’s a failure of imagination. Realizing the future might not look anything like the past is a special kind of skill that is not generally looked highly upon by the financial forecasting community. At a 2017 dinner I attended in New York, Daniel Kahneman was asked how investors should respond when our forecasts are wrong. He said: Whenever we are surprised by something, even if we admit that we made a mistake, we say, ‘Oh I’ll never make that mistake again.’ But, in fact, what you should learn when you make a mistake because you did not anticipate something is that the world is difficult to anticipate. That’s the correct lesson to learn from surprises: that the world is surprising.

To limit the time resource applied to any one company, he reminds himself of psychological research which suggests that in many contexts decisions are best made with no more than five to seven points of information. Any more information beyond that does not significantly improve decisions, and may even degrade them.

A common adage on Wall Street is that the markets are motivated by two emotions: fear and greed. Indeed, this book suggests that investors are affected by these emotions. However, acting on these emotions is rarely the wise move. The decision that benefits investors over the long term is usually made in the absence of strong emotions.

But if lacking emotions about your strategy or the stocks you own increases the odds you’ll walk away from them when they become difficult, what looks like rational thinking becomes a liability. The reasonable investors who love their technically imperfect strategies have an edge, because they’re more likely to stick with those strategies.

A trader needs to be highly skilled and extremely lucky to beat the market consistently. If a trader is highly skilled but not lucky enough or extremely lucky but modestly skilled, he will beat the market occasionally but not consistently. Traders that are modestly skilled and modestly lucky will briefly beat the market but will be behind the market most of the time. Everybody else will lose money on a long-term basis, that is, 90% of the traders.

Does affirmative action place minority students in colleges where they're likely to fail while depriving other applicants of the chance to attend the most challenging schools where they are capable of succeeding? Does rent control drive up the cost of housing, depriving property owners of the same opportunity to profit as any other investor while driving down the quality and quantity of the housing stock? Do minimum wage laws reduce the number of entry-level jobs, making it harder to escape from poverty? Because compassion, by its nature, subordinates doing good to feeling good, these are questions the warm-hearted rarely pursue.

The modern capitalist economy must constantly increase production if it is to survive, like a shark that must swim or suffocate. Yet it’s not enough just to produce. Somebody must also buy the products, or industrialists and investors alike will go bust. To prevent this catastrophe and to make sure that people will always buy whatever new stuff industry produces, a new kind of ethic appeared: consumerism. Consumerism sees the consumption of ever more products and services as a positive thing. It encourages people to treat themselves, spoil themselves, and even kill themselves slowly by overconsumption. Frugality is a disease to be cured. Consumerism has worked very hard, with the help of popular psychology (‘Just do it!’) to convince people that indulgence is good for you, whereas frugality is self-oppression.

Putting it all together, fluctuations in attitudes and behavior combine to make the stock market the ultimate pendulum. In my 47 full calendar years in the investment business, starting with 1970, the annual returns on the S&P 500 have swung from plus 37% to minus 37%. Averaging out good years and bad years, the long-run return is usually stated as 10% or so. Everyone’s been happy with that typical performance and would love more of the same. But remember, a swinging pendulum may be at its midpoint “on average,” but it actually spends very little time there. The same is true of financial market performance. Here’s a fun question (and a good illustration): for how many of the 47 years from 1970 through 2016 was the annual return on the S&P 500 within 2% of “normal”—that is, between 8% and 12%? I expected the answer to be “not that often,” but I was surprised to learn that it had happened only three times! It also surprised me to learn that the return had been more than 20 percentage points away from “normal”—either up more than 30% or down more than 10%—more than one-quarter of the time: 13 out of the last 47 years. So one thing that can be said with total conviction about stock market performance is that the average certainly isn’t the norm. Market fluctuations of this magnitude aren’t nearly fully explained by the changing fortunes of companies, industries or economies. They’re largely attributable to the mood swings of investors. Lastly, the times when return is at the extremes aren’t randomly distributed over the years. Rather they’re clustered, due to the fact that investors’ psychological swings tend to persist for a while—to paraphrase Herb Stein, they tend to continue until they stop. Most of those 13 extreme up or down years were within a year or two of another year of similarly extreme performance in the same direction.

Women select short-term sexual relationships when men cannot improve their children’s survival, when there are too few men, or when their upbringing has signaled that men are unreliable investors in their progeny. Short-term relationships for women often amount to serial monogamy in response to a population of males, none of whom can or will provide sustained economic and emotional commitment. And if she can maintain her attractiveness in the face of her increasing age, decreasing looks, and the handicap (from a prospective partner’s viewpoint) of already born children, she can also gain the advantage of genetic diversity and perhaps better genetic quality in her children. But the most secure and stable route is to attract a male who will commit, providing the long-term assistance and resources that she needs to raise multiple offspring simultaneously. Unfortunately that idea has occurred to other women also and she is in a competitive market-place. The currency of the marketplace is what men want in a female partner. To trade successfully, she must advertise her assets by showing that she has more desirable qualities than her female rivals.

IRA funds became a form of play money for the middle class... Because the pool of capital that made up an IRA could not be withdrawn for twenty or thirty years, many people viewed their IRAs as containing money they could experiment with. They could use an IRA to buy their first stock or their first mutual fund. They could put in in a money market fund first, and then, as they got bolder - and the bull market became more irresistible - shift some of it into something a little riskier. IRAs gave people a way to try on the stock and bond markets for size, to see how they felt, and to become slowly comfortable with the idea of investing. The knowledge that the money couldn't easily be withdrawn acted as a psychological safety net, allowing investors to feel as though they could take a chance or two. If they made a mistake, they reasoned, there was still time to recoup - several decades, perhaps.Over time, many people came to believe that it as imperative to maximize the returns they were getting on their IRA account, even at the risk of taking a loss. How else would they ever have enough to retire on? This, surely, is the classic definition of investment capital.

But most investors do capitulate eventually. They simply run out of the resolve needed to hold out. Once the asset has doubled or tripled in price on the way up — or halved on the way down — many people feel so stupid and wrong, and are so envious of those who’ve profited from the fad or side-stepped the decline, that they lose the will to resist further. My favorite quote on this subject is from Charles Kindleberger: “There is nothing as disturbing to one’s well-being and judgment as to see a friend get rich” (Manias, Panics, and Crashes: A History of Financial Crises, 1989). Market participants are pained by the money that others have made and they’ve missed out on, and they’re afraid the trend (and the pain) will continue further. They conclude that joining the herd will stop the pain, so they surrender. Eventually they buy the asset well into its rise or sell after it has fallen a great deal. In other words, after failing to do the right thing in stage one, they compound the error by taking that action in stage three, when it has become the wrong thing to do. That’s capitulation. It’s a highly destructive aspect of investor behavior during cycles, and a great example of psychology-induced error at its worst.

A few years ago my friend Jon Brooks supplied this great illustration of skewed interpretation at work. Here’s how investors react to events when they’re feeling good about life (which usually means the market has been rising): Strong data: economy strengthening—stocks rally Weak data: Fed likely to ease—stocks rally Data as expected: low volatility—stocks rally Banks make $4 billion: business conditions favorable—stocks rally Banks lose $4 billion: bad news out of the way—stocks rally Oil spikes: growing global economy contributing to demand—stocks rally Oil drops: more purchasing power for the consumer—stocks rally Dollar plunges: great for exporters—stocks rally Dollar strengthens: great for companies that buy from abroad—stocks rally Inflation spikes: will cause assets to appreciate—stocks rally Inflation drops: improves quality of earnings—stocks rally Of course, the same behavior also applies in the opposite direction. When psychology is negative and markets have been falling for a while, everything is capable of being interpreted negatively. Strong economic data is seen as likely to make the Fed withdraw stimulus by raising interest rates, and weak data is taken to mean companies will have trouble meeting earnings forecasts. In other words, it’s not the data or events; it’s the interpretation. And that fluctuates with swings in psychology.

We lack space here to discuss in detail the pros and cons of market forecasting. A great deal of brain power goes into this field, and undoubtedly some people can make money by being good stock-market analysts. But it is absurd to think that the general public can ever make money out of market forecasts. For who will buy when the general public, at a given signal, rushes to sell out at a profit? If you, the reader, expect to get rich over the years by following some system or leadership in market forecasting, you must be expecting to try to do what countless others are aiming at, and to be able to do it better than your numerous competitors in the market. There is no basis either in logic or in experience for assuming that any typical or average investor can anticipate market movements more successfully than the general public, of which he is himself a part. There is one aspect of the “timing” philosophy which seems to have escaped everyone’s notice. Timing is of great psychological importance to the speculator because he wants to make his profit in a hurry. The idea of waiting a year before his stock moves up is repugnant to him. But a waiting period, as such, is of no consequence to the investor. What advantage is there to him in having his money uninvested until he receives some (presumably) trustworthy signal that the time has come to buy? He enjoys an advantage only if by waiting he succeeds in buying later at a sufficiently lower price to offset his loss of dividend income. What this means is that timing is of no real value to the investor unless it coincides with pricing—that is, unless it enables him to repurchase his shares at substantially under his previous selling price.

By the end of 2008, however, the ingredients for a solid market recovery were in place. The over-levered funds that had received margin calls either raised additional capital, sold assets to de-lever as required, or liquidated. Funds and investment managers that received notices from investors desiring to withdraw at year-end either put up “gates” postponing withdrawals or completed the asset sales needed to meet them. The prices of debt securities reached a point where they implied yields so high that selling was unpalatable and buying became attractive. And, ultimately, market participants demonstrated that when negative psychology is universal and “things can’t get any worse,” they won’t. When all optimism has been driven out, and panicked risk aversion is everywhere, it becomes possible to reach a point where prices can’t go any lower. And when prices eventually stop going down, people tend to feel relief, and so the potential for a price recovery begins to arise.

Rising prices persuade all investors in ways the best marketers envy. They are a drug that can turn value-conscious investors into dewy-eyed optimists, detached from their own reality by the actions of someone playing a different game than they are.

To grasp why people bury themselves in debt you don’t need to study interest rates; you need to study the history of greed, insecurity, and optimism. To get why investors sell out at the bottom of a bear market you

It is not intuitive that an investor can be wrong half the time and still make a fortune. It means we underestimate how normal it is for a lot of things to fail.

Mohnish talked to me during that meal about a book called Power vs. Force: The Hidden Determinants of Human Behavior. The author, David Hawkins, explores the theory that we have a greater capacity to influence others when we’re an authentic version of ourselves since this truthfulness evokes a deep psychological response in others.

Consider what would happen if you saved $1 every month from 1900 to 2019. You could invest that $1 into the U.S. stock market every month, rain or shine. It doesn’t matter if economists are screaming about a looming recession or new bear market. You just keep investing. Let’s call an investor who does this Sue. But maybe investing during a recession is too scary. So perhaps you invest your $1 in the stock market when the economy is not in a recession, sell everything when it’s in a recession and save your monthly dollar in cash, and invest everything back into the stock market when the recession ends. We’ll call this investor Jim. Or perhaps it takes a few months for a recession to scare you out, and then it takes a while to regain confidence before you get back in the market. You invest $1 in stocks when there’s no recession, sell six months after a recession begins, and invest back in six months after a recession ends. We’ll call you Tom. How much money would these three investors end up with over time? Sue ends up with $435,551. Jim has $257,386. Tom $234,476.

I can afford to not be the greatest investor in the world, but I can’t afford to be a bad one. When I think of it that way, the choice to buy the index and hold on is a no-brainer for us.

This causes a vast increase in the amount of money, so that each individual unit of money, such as a dollar, becomes worth less than it was before. It takes lots more dollars to buy the same number of shares of stock. This, of course, is the classic form of inflation. In other words, war is always bearish on money. To sell stock at the threatened or actual outbreak of hostilities so as to get into cash is extreme financial lunacy. Actually just the opposite should be done. If an investor has about decided to buy a particular common stock and the arrival of a full-blown war scare starts knocking down the price, he should ignore the scare psychology of the moment and definitely begin buying.

keeping money requires the opposite of taking risk. It requires humility, and fear that what you’ve made can be taken away from you just as fast Our hit ratio is way too high right now. I’m always pushing the content team. We have to take more risk. You have to try more crazy things, because we should have a higher cancel rate overall. These are not delusions or failures of responsibility. They are a smart acknowledgement of how tails drive success. The historical odds of making money in U.S. markets are 50/50 over one-day periods, 68% in one-year periods, 88% in 10-year periods, and (so far) 100% in 20-year periods You have to survive to succeed When I asked Danny how he could start again as if we had never written an earlier draft,” Zweig continued, “he said the words I’ve never forgotten: ‘I have no sunk costs The irony is that by trying to avoid the price, investors end up paying double.

What is the range of likely future outcomes? • Which outcome do I think will occur? • What’s the probability I’m right? • What does the consensus think? • How does my expectation differ from the consensus? • How does the current price for the asset comport with the consensus view of the future, and with mine? • Is the consensus psychology that’s incorporated in the price too bullish or bearish? • What will happen to the asset’s price if the consensus turns out to be right, and what if I’m right?

Investors need to keep their emotions in check for a successful investment career. It is the most important requirement. It’s even more critical than having access to capital and markets.

To be a successful investor, you don't need to take excessive risks and be involved in all sorts of financial instruments. You need to understand your risk appetite and understand a few asset classes well. Stay within your boundaries, and your wealth will grow at a decent pace.

Greed and fear are both good and healthy for an investor and capital markets as a whole. Emotions are like fire, beneficial if controlled, destructive if wild.

Individual investors have significant advantages over professional money managers. Retail investors, like you and I, have nobody to report. We have no benchmark to beat and have no fear of capital flight. There are no quarter and year ends, and performance is not linked to calendars.

The market’s long-term trajectory is upward, which is the only direction the market can go over a long period.

All capital investments inherently suffer the risk of permanent capital loss. As an investor, it is your job to differentiate between market volatility and a permanent capital loss. You can only achieve this when you fundamentally understand why you bought the asset in the first place.

If investors do not know or never attempt to know the fair value, they can pay any price. More often, the price they pay is far greater than the actual value.

Traders and investors are humans, full of emotions, behavior biases, and good and bad past experiences. We don’t have much control over psychological shortcomings, and we routinely make decisions contaminated with our emotions and biases.

Bubbles do their damage when long-term investors playing one game start taking their cues from those short-term traders playing another.

What I had done was focus on a price that was of unique historical significance to me, only me, namely, my purchase price. Behavioral finance theorists, who have in recent decades begun to analyze the psychological errors in thinking that persistently bedevil most investors, call this anchoring (of yourself to a price that has meaning to you but not to the market).

The cover of Forbes magazine does not celebrate poor investors who made good decisions but happened to experience the unfortunate side of risk.

The more investors do active trading, the more it makes sense to do passive investing.

Another example, one that touches more people, is the nursing home industry. Numerous studies have shown that living at home, in a house or an apartment, is better psychologically, more fulfilling, and cheaper than living in nursing homes.14 Yet these institutions prosper when federal programs that foster living in the community are cut. There are also funding disincentives that the U.S. Congress, through Medicare and Medicaid, has created to ensure the profit bonanza of nursing homes. According to the activist disability journal Mouth (1995), there are 1.9 million people with disabilities living in nursing homes at an annual cost of $40,784, although it would cost only $9,692 a year to provide personal assistance services so the same people could live at home. Sixty-three percent of this cost is taxpayer funded. In 1992, 77,618 people with developmental disabilities (DD) lived in state-owned facilities at an average annual cost of $82,228, even though it would cost $27,649 for the most expensive support services to live at home. There are 150,257 people with mental illness living in tax-funded asylums at an average annual cost of $58,569. Another 19,553 disabled veterans also live in institutions, costing the Veterans Administration a whopping $75,641 per person.15 It is illogical that a government would want to pay more for less. It is illogical until one studies the amount of money spent by the nursing home lobby. Nursing homes are a growth industry that many wealthy people, including politicians, have wisely invested in. The scam is simple: get taxpayers to fund billions of dollars to these institutions which a few investors divide up. The idea that nursing homes are compassionate institutions or necessary resting places has lost much of its appeal recently, but the barrier to defunding them is built on a paternalism that eschews human dignity. As we have seen with public housing programs in the United States, the tendency is to warehouse (surplus) people in concentrated sites. This too has been the history with elderly people and people with disabilities in nursing homes. These institutions then can serve as a mechanism of social control and, at the same time, make some people wealthy.

Investors often regret the actions they take, but seldom regret the ones they do not.

The Intelligent Investor,

Michael Robinson is a Utah real estate investor. He graduated from Brigham Young University, and he has a degree in business and psychology with an emphasis in organizational behavior. Michael is athletic and enjoys running. He has completed X-Terra triathlons and regularly snow skis. He has used his real estate expertise and business acumen to serve the needs of homeless populations in third world countries, providing basic housing needs and resources.

The reasonable investors who love their technically imperfect strategies have an edge, because they’re more likely to stick with those strategies.

Stanford professor Scott Sagan once said something everyone who follows the economy or investment markets should hang on their wall: “Things that have never happened before happen all the time.” History is mostly the study of surprising events. But it is often used by investors and economists as an unassailable guide to the future.

simplicity of choice, and promise of satisfactory results, in terms of psychology as well as arithmetic.

Michael Robinson is a Utah real estate investor. He graduated from Brigham Young University, and he has a degree in business and psychology with an emphasis in organizational behavior.

The economists found that people’s lifetime investment decisions are heavily anchored to the experiences those investors had in their own generation—especially experiences early in their adult life.

Buffett’s fortune isn’t due to just being a good investor, but being a good investor since he was literally a child.

Buffett is the richest investor of all time. But he’s not actually the greatest—at least not when measured by average annual returns.

From a psychological point of view, the POD occurs when a hot-stock high-flyer breaks down severely, at which point it is able to bring in investors who missed the prior big price run and see the stock as “cheap.” This sets off a very rapid price advance back up to the highs and the left side of the POD that is quite simply unsustainable. At that point, everyone who is going to buy the stock has, and the sellers who hit the stock at the left side peak of the POD can now finish distributing their stock. With fewer “suckers” left to buy it, the stock then breaks down in rapid fashion and in most cases to new lows.

The roots of war are to be sought in politics and history, those of earthquakes in geophysics, of forest fires in patterns of weather and in the natural ecology, and those of market crashes in the principles of finance, economics, and the psychology of human behavior. Beyond the labels “disaster” and “upheaval,” each of these events erupted from the soil of its own peculiar setting. Still, there is an intriguing similarity. In each case, it seems, the organization of the system—the web of international relations, the fabric of the forests or of the Earth’s crust, or the network of linked expectations and trading perspectives of investors—made it possible for a small shock to trigger a response out of all proportion to itself. It is as if these systems had been poised on some knife-edge of instability, merely waiting to be “set off.

Robert Cialdini, a renowned academic who had written a book entitled Influence: The Psychology of Persuasion.

When investors have different goals and time horizons—and they do in every asset class—prices that look ridiculous to one person can make sense to another, because the factors those investors pay attention to are different.

Investor Trading Decision makers tend to place each investment into a separate mental account. Each investment is treated separately, and interactions are overlooked. This mental process can adversely affect an investor’s wealth in several ways. First, mental accounting exacerbates the disposition effect discussed in Chapter 3. Recall that investors avoid selling stocks with losses because they do not want to experience the emotional pain of regret. Selling the losing stock closes the mental account, triggering regret.

Three scholars illustrate the role of intelligence in a data set of Finnish investors in which they have IQ information from prior (mandatory) military service.8 They find that the high IQ investors’ portfolios outperform the low IQ investors by 4.9 percent per year. This higher return stems from the higher IQ investors exhibiting better market timing and stock picking. In addition, they are less prone to the disposition effect and the sentiment of other investors.

The tools of traditional finance, like modern portfolio theory, can help investors establish efficient portfolios to maximize their wealth with acceptable levels of risk. However, mental accounting makes it difficult to implement these tools. Instead, investors use mental accounting to match different investing goals to different asset allocations. This often leads to investors diversifying their portfolios by goal rather than in total. When investors pick investments in each goal-focused mini portfolio, they examine each choice’s individual risk and return characteristics and ignore their diversification characteristics. They eliminate the choices they view as inferior and then often simply divide their money equally among the acceptable choices.

Psychological research has shown that the brain uses shortcuts to reduce the complexity of analyzing information. Psychologists call these heuristic simplifications. These mental shortcuts allow the brain to generate an estimate of an answer before fully digesting all the available information. Two examples of shortcuts are known as representativeness and familiarity. Using these shortcuts allows the brain to organize and quickly process large amounts of information. However, these shortcuts also make it hard for investors to analyze new information correctly and can lead to inaccurate conclusions.

These results suggest that optimistic investors bid up speculative stocks to overvalued levels. When the optimism becomes high, so does the stock price. Eventually, the optimism reaches its peak. From these high levels, the stocks subsequently earn a lower return. Pessimistic investors avoid speculative stocks, which fall to a low level. As the sentiment gets more negative, stocks decline.

The brain often uses the familiarity shortcut to evaluate investments. This can cause people to invest too much money in the stocks that are most familiar to them, like their employer’s stock. Ultimately, this leads to a lack of diversification. In summary, investors allocate too much of their wealth to their employer, local companies, and domestic stocks.

When individual investors are optimistic, the demand for these funds increases and the discount declines. Pessimistic investors sell the funds, and the discount increases.

The portfolios of overconfident investors will have higher risk for two reasons. First is the tendency to purchase higher-risk stocks. Higher-risk stocks are generally from smaller, newer companies. The second reason is a tendency to underdiversify their portfolios. Prevalent risk can be measured in several ways: portfolio volatility, beta, and the size of the firms in the portfolio. Portfolio volatility measures the degree of ups and downs the portfolio experiences. High-volatility portfolios exhibit dramatic swings in price and are indicative of underdiversification. Beta is a variable commonly used in the investment industry to measure the riskiness of a security. It measures the degree a portfolio changes with the stock market. A beta of 1 indicates that the portfolio closely follows the market. A higher beta indicates that the security has higher risk and will exhibit more volatility than the stock market in general.

One financial study examined the types of information, experience, and portfolio returns of investors.14 The study confirmed that lower returns occur for less-experienced investors when they rely more on unfiltered information. Relying on filtered information improved returns for these investors. More experienced investors can achieve higher returns using unfiltered information. Presumably, experience helps them turn knowledge into wisdom.

Another important psychological factor is the illusion of control. People often believe they have influence over the outcome of uncontrollable events. The key attributes that foster the illusion of control are choice, outcome sequence, task familiarity, information, and active involvement.18 Online investors routinely experience these attributes.

If this firm announces good news (like a great earnings report), the selling of this winner will temporarily depress the stock price from fully rising to its deserved new level. From this lower price base, subsequent returns will be higher. This price pattern is known as an “underreaction” to news and a postannouncement price drift. Frazzini showed that the postannouncement drift occurs primarily in winner stocks where investors have unrealized capital gains and loser stocks with unrealized capital losses.

Too much optimism leads investors to underestimate risk and overestimate expected performance. Optimistic investors tend to seek good-story stocks and be less critical. Pessimistic investors tend to be more analytical. Extended,

Psychologists have reported correlations between the full moon and depressed mood. If the lunar cycle impacts investors, then they may value stocks less during a full moon relative to a new moon, thus causing a lower return around the full-moon period.

They say that the biggest opportunities are often outside of most people’s comfort zones. The juiciest market returns are where very few are willing to go. Momentum investing is the ultimate contrarian approach. How many investors would venture to buy a stock that is already up 50% in the past six months? Psychologically, it is a lot harder to buy in this situation than to sell, isn’t it?   How ridiculous does it sound that stocks that went up 50% in the past six months are likely to outperform in the next six months? Stock picking cannot be that easy, right? There has to be some complicated formula that takes into account hundreds of different criteria in order to have a chance at outperforming the market. Sometimes the most effective methods are the simplest. Most people stay away from them exactly because they seem too simple to work. There is nothing magic about using past performance to select future winners. It is all about simple math.   What

Effect On Culture Organizations are made up of people. Those people work and “live” there with other people at least 40 hours per week. Like the connective tissue that begins to form when we are injured or when we are healing and becomes a part of who we are, team members are a part of the connective tissue of the organization. What happens when we remove or tear out a piece of that tissue? Not only does it hurt a lot, it causes heavy bleeding. If it doesn’t heal properly, there are complications. We may never regain our function in that area. When good productive people leave, we feel the pain and so does the culture of the team. The only way to mend the tissue permanently is to do the right things to engage and retain them. Spillover Effect We don’t talk about this much, but there is a psychological impact on other productive and engaged employees when they are forced to work with disengaged employees. Whether it is during water cooler talk or just in combined work spaces, the negative energy that disengaged employees pass to the entire team and organization can be toxic. Oftentimes, the disengaged employees are the scapegoats to deeper organizational issues. When we do not look at what is causing them to be disengaged, we enable the spillover effect to continue. Organizations that want a thriving workplace must rid themselves of disengaged employees, not necessarily by termination, but by living by the Laws found in this book. Negative Word Of Mouth Remember that unhappy employees don’t make for good promoters of your brand. In fact, disengaged employees are likely to tell more people and blurt it out all over social media and at every party. Reputationally, this negative word of mouth works against your brand promise. Who are you out in the world to your customers? Whatever that is, it must match who you are to your employees. Loss Of Organizational Stability Stop for a minute and think about what it says to your customers, partners, and investors when your employees keep walking out the door. Potentially, they could be in the middle of a complex project implementation and having a consistent point of contact through that process is key.

Their evidence supports life-cycle predictions that older investors hold less risky portfolios. They also show evidence that experience leads older investors to exhibit stronger preference for diversification, trade less frequently, exhibit greater propensity for year-end tax-loss selling, and exhibit fewer behavioral biases. Consistent with cognitive aging effects, they found that older investors exhibit worse stock selection ability and poor diversification skill. As investors both age and gain experience, their investment skill increases. Then, as cognitive aging begins, that skill starts to diminish, even while gaining more experience. The investment skill deteriorates sharply starting at the age of 70. The impact of the declining cognitive ability results in an estimated 3 percent lower risk-adjusted annual returns and that underperformance increases to over 5 percent among older investors with large portfolios. Thus, there are real economic consequences to cognitive aging.

In April, 1926, France and the United States finally negotiated a war debt settlement at forty cents on the dollar. The [French] budget was at last fully balanced. Still the franc kept falling. By May, the exchange rate stood at over thirty to the dollar. With a currency in free-fall, prices now rising at 2% a month - over 25% a year - and the Government apparently impotent, everyone made the obvious comparison with the situation in Germany four years earlier. In fact, there was no real parallel. Germany in 1922 had lost all control of its budget deficit and in that single year expanded the money supply ten fold. By contrast, the French had largely solved their fiscal problems and its money supply was under control. The main trouble was the fear that the deep divisions between the right and left had made France ungovernable. The specter of chronic political chaos associated with revolving door governments and finance ministers was exacerbated by the uncertainty over the governments ability to fund itself given the overhang of more than $10 billion in short term debt. It was this psychology of fear, a generalized loss of nerve, that seemed to have gripped French investors and was driving the downward spiral of the franc. The risk was that international speculators, those traditional bugaboos of the Left, would create a self-fulfilling meltdown as they shorted the currency in the hope of repurchasing it later at a lower price thereby compounding the very downward trend that they were trying to exploit. It was the obverse of a bubble where excessive optimism translates into rising prices which then induces even more buying. Now excessive pessimism was translating into falling prices which were inducing even more selling. In the face of this all embracing miasma of gloom neither the politicians nor the financial establishment seemed to have any clue what to do.

History is mostly the study of surprising events. But it is often used by investors and economists as an unassailable guide to the future.

A rational investor makes decisions based on numeric facts. A reasonable investor makes them in a conference room surrounded by co-workers you want to think highly of you, with a spouse you don't want to let down, or judged against the silly but realistic competitors that are your brother-in-law, your neighbor, and your own personal doubts. Investing has a social component that's often ignored when viewed through a strictly financial lens.

Wall Street treats all crises the same despite the fact that people react to the threat of war very differently from other crises like disease, systemic medical incompetence, or the failure to maintain a country’s transportation infrastructure.

Great intelligence and good luck are not required. The essential characteristics of the successful investor are the discipline and stamina to, in the words of John Bogle, “stay the course.” Investing is not a destination. It is an ongoing journey through its four continents—theory, history, psychology, and business.

It comes from investor John Templeton’s view that “The four most dangerous words in investing are, ‘it’s different this time.

Of all the unlikely people to get mixed up with Madoff’s Ponzi scheme, Stephen Greenspan is the type of person you’d expect to be immune to investment fraud. With advanced degrees from Johns Hopkins University, he spent his career as a clinical professor of psychiatry at the University of Colorado studying social incompetence and gullibility. At the time of his retirement, Greenspan had published nearly 100 scientific papers and was well-known in psychology for his book Annals of Gullibility. With interest and expertise in the science of gullibility, shouldn’t Greenspan have recognized that Madoff’s firm was a scam? Yet he too was one of BLMIS’s private investors.

My favorite Wikipedia entry begins: “Ronald James Read was an American philanthropist, investor, janitor, and gas station attendant.

But even if you don’t have other offers or the interested buyer is your first choice, you have more power than before your counterpart revealed his desire. You control what they want. That’s why experienced negotiators delay making offers—they don’t want to give up leverage. Positive leverage should improve your psychology during negotiation. You’ve gone from a situation where you want something from the investor to a situation where you both want something from each other.

More importantly, the value of wealth is relative to what you need. Say you and I have the same net worth. And say you’re a better investor than me. I can earn 8% annual returns and you can earn 12% annual returns. But I’m more efficient with my money. Let’s say I need half as much money to be happy while your lifestyle compounds as fast as your assets. I’m better off than you are, despite being a worse investor. I’m getting more benefit from my investments despite lower returns.

As investor Michael Batnick says, “some lessons have to be experienced before they can be understood.

Why the difference, if Simons is such a better investor? Because Simons did not find his investment stride until he was 50 years old. He’s had less than half as many years to compound as Buffett. If James Simons had earned his 66% annual returns for the 70-year span Buffett has built his wealth he would be worth—please hold your breath—sixty-three quintillion nine hundred quadrillion seven hundred eighty-one trillion seven hundred eighty billion seven hundred forty-eight million one hundred sixty thousand dollars. These are ridiculous, impractical numbers.

opportunities for investment gains improve when: the economy and company profits are more likely to swing upward than down, investor psychology is sober rather than buoyant, investors are conscious of risk or—even better—overly concerned about risk, and market prices haven’t moved too high.