PSYCHOLOGY OF INVESTING

  THIS BOOK HAS BEEN AN INTERESTING JOURNEY FOR ME. I READ IT ON A TRIP TO INDIA RECENTLY. 

I know that just "the facts investing" is the best way to do it. However this book reminded me of the psychological factors that can enter into the journey. Here are a few take aways from this book.

1. We do not always make rational decisions in life and especially when it comes to money. 

2. Overconfidence is a major cause of irrational, un-researched decisions when investing. 

3. An illusion of control can set into an investor's thinking. They can deceive themselves into thinking that having the power of the click (internet investing), lots of information, active involvement without broker hindrances, and past successes that they "have this." Don't be self deceived. Do your homework.

4. We are motived by pride and regret. Pride when we made a good decision and regret when we have made a bad decision. The choice of good and bad can even be skewed by reference point. For example:

Investor A buys 100 shares of stock A at $50 a share. It goes up to $100 in over a year. He is a trader not an investor so he denies the temptation to see the stock. Later it goes down to $75. He chooses to sell it because management has changed and the fundamentals are in jeopardy. However, the pride in the investment he should feel is dwarfed by his reference point. His reference point became $100 once the stock hit that. He still had a 50% return on his investment plenty to have pride. 

5. Investors tend to risk more when they sell gainers or the "house money" effect. Since it is not your original money you invested then "what the heck" take a risk on a no name company. You might just hit is big. Don't do this. Stick with the fundamentals. You probably should have not sold that winner in the first place. Long term is best. 

6. When you use the words "average up your cost basis" you have just made the double down mistake in investing. You have a company that turns out to be a dog and it goes down, bad earnings report consistently for two quarters or more, and you are in a dilemma. You don't want to feel that regret. So what do you do? Ugh. Average your cost basis. Not good. Say never to this. Just buy a company that meets the criteria of good investments. 

7. Mental accounting can hurt your. Verify  your impressions, thoughts, feelings, and the like with sound fundamental analysis. You might just stay above water.