Mastering Investor Psychology: Avoiding Common Traps and Maximising Returns
8th June, 2023Investing in the stock market can be an exciting and potentially profitable experience, but it requires knowledge, experience, and discipline. Many investors make mistakes, especially during volatile times, and end up losing money. This is often due to behavioural biases and psychological pitfalls. In this episode of the Galaxy Brain Investor series, Theo focuses on investor psychology, looking at common mistakes that investors make, and how you can potentially avoid them.
The first trap Theo discusses is the belief that future market returns will be similar to those in the past. This is not always true, and high market valuations cannot be supported indefinitely. Investors need to have confidence in their assumptions and ask themselves why they believe what they do.
Another common mistake is failing to recognise the mathematics of investing. For example, if an investment falls by 50% and then recovers by 50%, the investor still has a loss of 25%. Similarly, it can be tempting to throw good money after bad or hold onto an investment that has lost value instead of cutting losses and investing elsewhere.
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The herd mentality can also be a trap for investors. It is easy to follow the lead of others and invest in a sure-fire bet, but this is often driven by fear of missing out (FOMO) and can lead to irrational increases in market prices that inevitably come to an end.
Theo discusses why investors should be wary of their self-assessment of their investing skills and knowledge. Excessive confidence, if misplaced, can lead to discounting risks and over-investing. Investors need to think carefully about the information they rely on when making investment decisions. Representativeness bias, the inclination to be influenced by recent behaviour or to see patterns where none exist, can be a trap for investors.
Investing requires discipline, knowledge, and experience. Understanding and avoiding common behavioural pitfalls and psychological biases can help investors make better decisions and avoid costly mistakes. Make sure you watch the video to find out more about how by being aware of these traps, investors can improve their chances of success.
