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I’ve been saying for years that people need to discover their investment personality in order to achieve success. You can’t invest well if you’re fighting your own personality. When I figured out I was a buy and hold, value investor I became very successful because I could focus on investments which fit me. It makes me a good landlord, it also made me successful in stocks.

Would I trust someone else to use psychology? It would probably be a gimmick in most cases because they wouldn’t really implement it. The article itself focuses on the old garbage about risk tolerance and stuff no one really knows how to measure.
 

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I find that applying Gestalt psychology (theory of perception) to investing, and other areas as well, can be useful. In order to see something, one has to not see an array of other things. That can be a problem if one gets locked into only seeing one thing - they don't become aware of what they are not seeing. What they are not seeing could be essential to success.
 

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Discussion Starter #4
I’ve been saying for years that people need to discover their investment personality in order to achieve success. You can’t invest well if you’re fighting your own personality. When I figured out I was a buy and hold, value investor I became very successful because I could focus on investments which fit me. It makes me a good landlord, it also made me successful in stocks.

Would I trust someone else to use psychology? It would probably be a gimmick in most cases because they wouldn’t really implement it. The article itself focuses on the old garbage about risk tolerance and stuff no one really knows how to measure.
... thought so too. Sounds like sophisticated make-shift projects for these finance professionals to justify their pay.
 

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I have been looking at the effects of psychology in many areas. To me its a part of your personality, and gives you greater awareness on why people behave the way they do in maybe areas, not just investing. As JAG says, understanding your investment personality is really important. I personal KNOW what I need to do, I have good grasp of investing and financial concepts, however my personality causes me to do some silly things. For I have some opposite personality traits. I tend to either over analyze and then never invest my money, or I can be impulsive and make rash decisions on my investments. I don't have a very good middle ground, even though I know better. For that reason, I have generally used an advisory I have trusted to bring me that balance. I get him to do my analysis and make recommendations, and then execute my decision. It prevents over analysis on my part and doubting and waiting then not doing anything. On the flip side, I have come up with some rash ideas, and my advisor has walked me through it to think things through a little further.

My biggest strength has been knowing my many weaknesses and being able to find ways to counter them.
 

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I think people forget (not people in this forum mind you) that ultimately everything when it comes to investing boils down to good behaviour over time.

Example 1: You could be the worst investor, jumping in and out of the markets, but if your behaviour is to save like a madman you'll end up fine and likely overcome many mistakes.

Example 2: Conversely, if you adopt and diligently follow a lazy investing approach (i.e., Couch Potato; buyer and holder of quality stocks; other) then you might not save much over your career but because you avoided poorly timed decisions you'll also end up just fine.

Example 3: You totally feared the stock market, for decades and instead held GICs and bonds all your life. In doing so, you saved early and often; that money grew over time. You also ended up just fine.

Having a good grasp of financial concepts is very helpful, it will help you optimize and usually accelerate your wealth. However, your behaviour with money management is ultimately a major influence on wealth creation - not what you invest in.
 

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I’ve been saying for years that people need to discover their investment personality in order to achieve success. You can’t invest well if you’re fighting your own personality. When I figured out I was a buy and hold, value investor I became very successful because I could focus on investments which fit me. It makes me a good landlord, it also made me successful in stocks.

Would I trust someone else to use psychology? It would probably be a gimmick in most cases because they wouldn’t really implement it. The article itself focuses on the old garbage about risk tolerance and stuff no one really knows how to measure.
Guy your right on about having investment method fit your personality. Few can achieve it for few are independent thinkers. With the bubble in education of memorize & repeat with no understanding instead of the primary focus on thinking is the perfect set up for everyone to be on one side of the market to put in an historic high followed by an historic crash @ some point in the future as everyone goes to the same side of the trade.

Have to take the math past that of Newton to cycles. There are times when buy & hold value investing will be profitable & times when it will lose money. The price structure of the market is fractal in nature which results in long & short waves of buy & hold working & not working.

The thinking of the masses can bend the thinking of even the most advance of intellect. @ an historic market top risk tolerance is going to be a lot higher then the risk tolerance @ a historic bottom.
 

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How many rich psychologists do you know?

When I read the article, it is not about using psychology to determine how to invest. It's about teaching advisers how to use psychology to manipulate clients.
 

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How many rich psychologists do you know?
... a few (in Ontario) but not as rich as Warren Buffett though.

When I read the article, it is not about using psychology to determine how to invest. It's about teaching advisers how to use psychology to manipulate clients.
... lol, I like your honest assessment of that article!
 

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I think that understanding human emotional tendencies is very important to investing. At the very least, one has to understand the psychological effects all humans are vulnerable to (thinking you're smarter than you are, chasing returns, fear, greed, hindsight bias, survivorship bias, etc).

For example, I've invested through two bear markets and have had friends and colleagues who were stock investors. I know a handful of people who said they were fine with volatility and could handle stock market losses. In the real world, they couldn't handle it... for a variety of very interesting reasons, it turned out that declines in the stock market are very tough for real humans to handle. Some of them don't invest at all any more. At least two close friends of mine were burned and scarred so badly, that they haven't touched any investments for the following 11 years.

I've learned a lot by observing the experiences of friends. It's showed me that human psychology is an extremely important part of investing.

Another quick example is survivorship bias. We have a lot of people on this board who seem to have excellent investment results... at first glance you might get the impression that many people do great with stock investment. But there's a survivor effect here. We only hear from the people who happened to do very well. For every "successful" investor on this forum, how many other people (who aren't here) suffered tremendous losses or investment disasters? People don't go onto investment forums to brag about how bad and life-destroying their losses were.
 

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That’s a benefit of a lazy buy and hold investor. In my case I rarely check my returns...I’ve gone through several bear markets and completely missed them as far as checking my portfolio goes. Never worried about the losses, because I didn’t know it had happened. Even today, I’m not sure how bad my “losses” were during this times...it doesn’t really matter as it’s in the past.
 

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That’s a benefit of a lazy buy and hold investor. In my case I rarely check my returns...I’ve gone through several bear markets and completely missed them as far as checking my portfolio goes. Never worried about the losses, because I didn’t know it had happened. Even today, I’m not sure how bad my “losses” were during this times...it doesn’t really matter as it’s in the past.
I'm not sure that's a "benefit" or something to aspire to. You just got lucky that the prices bounced back relatively quickly (they might not have) and that you didn't need the money before the eventual rebound.

What if you tried doing the same thing during Japan's 30 year bear market or some of the 15-20 year bad stretches in history?
 

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Well, first off I usually buy in bear markets, so my original purchases were discounted the last time there was a crash. It’s rare that one crash falls lower than the previous one.

Second, I never buy anything with money I may need. Anything I do buy I consider spent money, as In a cup of coffee spent, never to return.

So far, my strategy has worked really well, but I don’t get a lot of opportunities to increase my holdings.

Never have any problems sleeping since I stopped being broke.

It was tough when you put a portion of your tiny savings and have to wait for it to take root.
 

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There are so many individual differences among investors, I think it's good at a place like CMF to read how others reason through things. Thanks Just a Guy for talking about your strategy and view.

I enjoyed reading this article, very relevant. There's also a link to the PDF at the top if you want to print it.

The Psychology of Money
 

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I witnessed the dot bomb immediately before retiring in 2002. So my retirement plans were much more modest than they might have been in 2000. So I played amateur trader for a couple of years until I felt comfortable with our stash. And that slump did not rebound. After that 2008 was easy, partly because we took money out of the market in 2007 to buy our condo in Mexico. We made out on exchange gains on that one. But I readily admit it was lucky timing. But we were just focused on living our lives. Then we were pleasantly surprised by the lower COLA in Mexico for 6 months (the surprise was that it was better than we had planned).

So while we are comfortable now, we admit to an element of luck. But luck seems to come to those who dare.

Of course, lately the run has been amazing. My kids will make out like bandits if it does not correct.

(We are doubling down on Mexico real estate but we consider it a lifestyle expense.)
 

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A lot of successful investors noticed that once they mastered the markets the biggest impediment to their success was their own psychology. You don't necessarily realize it until you have a successful method of investing then notice you keep sabotaging yourself. Unsuccessful investors do the same but blame their losses on everything but themselves. I don't know what you can do about this.
 

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Is this a fancy way of saying "let your emotions dictate your investing strategy?" I feel like this is a game that should be played as objectively as possible, not subjectively.
 

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A lot of successful investors noticed that once they mastered the markets the biggest impediment to their success was their own psychology. You don't necessarily realize it until you have a successful method of investing then notice you keep sabotaging yourself.
I think one's own thoughts (and human instincts) are a huge obstacle to successful investing. I think this is why couch potato and indexing approaches turn out so well. Dividend investing too! (assuming you don't turn it into a stock-picking game). These "good methods" are not the most ambitious, most aggressive or even the most intelligent approaches. However by eliminating many bad human behaviours, they end up doing better than many alternatives.

For me, one of the starting points was acknowledging that I don't know what's going to happen in the world. I used to think I could figure everything out. Now, after 20 years of investing, I say: I really have no clue how this will play out. There are too many weird and unpredictable things that could happen.
 
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