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Successful investor’s mindset. why Warren Buffett might be wrong.

by prince

What are the Successful investor’s mindset?

Successful investor’s mindset is very important to start investing. The investment success and failure like in the stock market are mainly driven by the balance of Fear and Greed. I will explore why we have these emotions and how you can be a better investor after reading this.

There are two mental abilities that are vital in a successful investor, the knowledge of investing, and the emotion of investing.

Many have acquired the knowledge of investing such as in the understanding of the investment data and how to analyze fundamentals of stocks but the more important of the two mental abilities is the mastering of the emotion of investing.

Many do not understand this and even those who are aware of it will find it difficult to suppress emotion and to act logically because it is against human nature.

Through our evolution, fear and greed are inbuilt emotions in humans. These emotions ensured our survival for many thousands of years.

During our evolution, humans that have a heightened fear were quicker to react to dangerous situations and are more likely to survive and reproduce.

It is a trait that we inherited through natural selection. Similarly, the emotion of greed has been naturally preserved to ensure personal and family survival by denying or defending competitors from obtaining the same opportunities.

Although I’m using stocks and shares investing as an example what I am about to discuss applies to all types of investment asset classes including real estate investment.

successful investor's mindset

Investors need to understand that prices and the value of each stock or shares are separate numbers. Price is what you paid for a stock and the value is what you actually get.

Shouldn’t all stocks be priced at what it is valued at? This is where greed and fear come into play. These emotions are well recognized in the investment industry and the indices such as the volatility index also known as the fear index and the CNN Money Fear and Greed index are used to quantify this phenomenon.

In any form of investment, logic tells us that investors need to buy at a lower price and sell at a higher price. However, our emotions caused us to detach from this logical approach.

selling high buying low

Most investors end up buying at higher prices and selling at lower prices.

Greed:

Many investors want to get rich in the shortest possible time and this can easily trigger our greed emotions during market prices increase or bull markets.

Many investors decision is driven by emotions of greed and not market fundamentals or the underlying asset potential value.

Greed drives prices of stocks above its actual value this has been seen time and time and again for example in the dot-com boom bubble where every technology company was widely priced way above any valuation figures.

During stock market bull rallies this emotional grid is also compounded by the emotion of fear of missing out on the modern terminology is FOMO.

Similarly during the crisis of Covid-19 prices of stocks in some companies are wildly over the evaluation due to greed despite the reported severe economic downturn with bankruptcies and rocketing of the unemployment figures.

Greed has driven investors to keep chasing and investing more when the prices are already high. The reason for the increase in price is because there are more buyers than sellers.

More buyers are rushing in to invest at a high price. This is obviously going against logical investing. When there is bad news such as natural disasters, or political instabilities stock prices decrease as one would expect.

However due to fear in us the sell-off or drop in stock prices are way more than what their valuation should be.

A few companies can even go bankrupt in a few weeks but we are talking about a fall on average of over 30% across the top 500 companies value in a few weeks.

Most of this fall in prices is due to fear. Look at the steep decline again, it basically means there are more sellers than buyers overall.

You can see fear alters our most basic logic again more investors are selling low where the logic is to be buying at low prices,

How to be a successful investor emotionally?

We have now established that fear and greed are bad in investing.

How should we be investing?

To put it simply, do your research have a clear goal and plan and stick to it without any emotional input. Effectively to be successful in investing you need automation like robots.

Stick to your investment goals and rules and leave the human factor out of it. One of the best ways of doing this is to set up an automated investment system such as a regular deposit into your investment account and keep investing according to your goals.

If you have done the due diligence and research well, your investment should gradually increase in value and price over time and generally above the inflation rate.

successful investor's mindset

If possible avoid checking on your investment too often unless there is a need for it such as a retirement plan update. Fear and Greed are the main cause of market volatility and exaggerated price swings, and for the illogical investor to buy high and sell low.

Investments should be as automated as humanly possible. For example, road accident deaths cause over 1.3 million deaths every year most of these areas a result of human factors.

I suspect the majority of the deaths could be avoided with driverless cars. In the future, we will look back and question how on earth did we allow humans to drive.

Similarly in investing if the investment was automated overnight, we will all be more successful investors but I suspect this will not be happening anytime soon due to the incentive of active investment.

In the industry unable to overcome and allowing our emotions to govern our investment behavior can cost you a lot of money. First, we have to accept that we humans have an inbuilt weakness.

We have to get automated and stick to the long-term investment plan. I’m not saying that emotions are not useful, we are social animals but just leave emotions out of investing, and also driving.

Warren Buffett’s famous quote

"Be fearful when others are greedy and be greedy when others are fearful"

but I do not agree with the quote. The best economies failed to predict the market crashes time and time and again.

Similarly, professional traders and fund managers do this full-time fails to time the market. So do you really think we stand a chance trying to time the market?

Let me be clear I do think Warren Buffett is a very successful investor but we do have to take his words of advice in context. He probably has hundreds of analysts or researchers providing him data to time the market and buy value stocks.

But most investors don’t have that luxury but what we can all learn from Warren Buffett’s emotionless investing by sticking to logical investing.

To summarize, invest with a logical goal and leave human emotion out of your investments. By just having the knowledge of investing without understanding and adopting emotionless investing is a sure way of losing your money.

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