We are living in the world of the old Chinese curse, “interesting times.” With the economic mess the world is in, we see despair alternating with hope every day. This fact is reflected in stock prices almost daily. Now, of all times, is when successful investing requires a dispassionate approach to market psychology as well as your own investment psychology.
Bulls, Bears, and Successful Investing
The investment psychology of bulls is that they live in the hope that the market will always recover and that prices will always go up over time.
The investment psychology of bears is that they live in the despair, or pessimism, of the contrarian. The successful bear believes in dispassionate investing and tries to play market psychology to reap their profit.
Bulls can get wiped out when companies fail and bears can get caught short and lose everything. So, it would seem being purely a bull or purely a bear is not the way to go.
Everyone is prone to despair out of proportion to the events of the day. Everyone wants to live in hope of a better tomorrow. Couple these natural human propensities with the anxiety that comes with trying to outguess market psychology when things are chaotic and you will most likely develop ulcers. You live in the ancient Chinese curse, “May you live in interesting times.”
When the market psychology of despair drives down the stock price of sound companies, it’s time to put aside despair and buy for the long term. When the market psychology of misplaced hope drives up the price of poorly run companies based upon a snippet of news, it’s time to get out of the stock. If you think the company has promise, perhaps it’s time to place a buy order at a substantially lower price.
In general, sound investment plans and investment strategies are good. Investment psychology tends to be bad. Investment plans and strategies are usually devised when you are cool, calm and collected. Investment psychology tends to kick in when times are crazy. Investment psychology tends to make you one with the whims of the day. Investment psychology tends to lose you money.
The Media, Hope, and Despair
The media have their own agenda, which is to sell newspapers or to get you to watch the ads on their television stations. This author can recall when the major news media switched from dispassionate reporting of the news to hyping the news near the end of the Vietnam War. “News at 6 and pictures at 11” became to teasers to get you to tune in later. The media thrive on reporting, and often creating, hope and despair, often on the same issue in the same couple of days. Dispassionate investing avoids the media’s attempts to play with psychology, YOUR investment psychology, like the plague.
The point of having a system, or investment plan, is to take advantage of market psychology, minimize your own investment psychology, and engage in dispassionate, successful investing.
Stick with your plan. Execute your plan. Re-evaluate your plan as needed. Market psychology will often drive prices to you. You do not need to respond to your own anxiety by being busy. You do not need to buy or sell based upon anxiety. Patience in execution of your investment plan is the key to dispassionate investing.