Most of their first trades bring them a certain amount of profit. Those profits are like a binding addiction and make them believe that they will get rich quickly. Many people only focus on speculation, trading many times a day instead of investing.
For ordinary individual investors, when the market reverses from up to down, their mood is like sitting on a roller coaster. Usually, when the market's bullish wave enters the final stages, they start to pay attention and buy. In general, most of their first trades bring them a certain amount of profit. Those profits are like a binding addiction and make them believe that they will get rich quickly. Many people only focus on speculation, trading many times a day instead of investing.
Investors moved on to new opportunities with higher risks, some even going so far as to become day traders. They attended conferences and spent a lot of money on tips and software that would tell them when to buy and when to sell.
And then the bubble burst. With no experience in market cycles, these investors froze in fear. Seeing their investments plummet in value and their paper profits evaporate in the blink of an eye, they, who had never been prepared and had no idea how to deal with a rapid market crash, were left with nothing to do but give up. After swearing never to get involved in the market again, they turned to cursing the founders, the regulators, the government, and anyone else they could think of except themselves.
Meanwhile, professional investors and experienced individual investors play a completely different game. They are like lone knights, constantly challenged to act differently from everyone else and sometimes have to resist the sweet talk that entices them to join the frenzied crowd rushing like moths to a flame. These investors buy when the bear market is about to end, when these assets are undervalued and begin to rise. Their task is both difficult and lonely, because the financial media is full of bad news, while most people believe that the market will never recover. Others fear the market like a tiger and have absolutely no interest in it. For them, anyone who rushes into the market now is a fool who has lost his way.
However, this is a good time to buy.
It usually takes a long time for the market to transition from overvalued to undervalued. Professionals and smart individual investors start buying at the bottom of the cycle and continue buying as the market moves into an uptrend. When the market returns to normal, everything starts to reprice. They sit back and watch their assets grow with profits.
For the inexperienced investor, who almost lost everything in the late stages of the process, they learn nothing from their mistakes. However, there are a few who see the lesson and act completely differently the next time, thereby joining the ranks of successful investors.
It seems simple enough when you understand how it works. Start buying when the bear market is about to end and continue buying as the market moves up. When the market is overvalued, start selling when others are buying and only have small exposure to the market when the bull market song is about to end.
However, doing that is not easy at all. The difficulty lies not in the logic of the problem, but in our minds. And below are 7 specific problems in investing that everyone should avoid.
1. Thinking that someone can predict the market
There is a common belief in the market that we can predict the future, or at least there are some “Living Gods” who are capable of doing this and can tell and teach us that skill. The truth is, the future is almost impossible to predict with any regularity and accuracy.
In every area of life, experts overestimate their predictive ability. But nowhere is the task of forecasting more difficult, and the experts fail more often, than in the financial markets.
To be successful, we need a different strategy. Forget about forecasting and create a strategy that works even when we can't predict how things will turn out. In fact, the trading rule we just discussed is incredibly obvious: Buy when it's cheap and sell when it's expensive.
2. Trying to be Perfect
In the investing game, perfectionists are the ones who have the hardest time. Because investing means managing uncertainty, not trying to find certainty within your ability to calculate. These investors always hold back on investing until the perfect moment they want. They want to hit rock bottom. This is impossible except for two types of people: (1) the extremely lucky and (2) the liars.
To be successful, we must accept and learn to manage uncertainty. Even though we know the market can go lower before it goes up again, we still have to make the decision to buy, because we don’t know when the market will hit rock bottom, except in hindsight.
The best investment decisions are often the most difficult ones.
3. Fear of making mistakes
This is closely related to “trying to be perfect.” However, this disease is not only for perfectionists. No one in this world likes to make mistakes. However, since it is impossible to predict the performance of the market on a regular basis, the best we can do is to recognize opportunities and manage uncertainty, which can be considered an indispensable part of investing.
Then we will build our orientation through an investment portfolio, which helps us to further strengthen our expectations. At the same time, sell all the investments that disappoint. More importantly, maintain a safe margin for investment by buying good projects at low prices, combined with owning a solid source of money and carefully managing risks.
4. Inability to act independently
Because we need to act in a way that is almost contrary to the crowd around us, investing can be said to be a very lonely profession. For those who rely on the support of their peers in all aspects of their lives, investing can be a daunting task, unless they surround themselves with people who understand the need to act contrary to media reports and popular opinion.
At the most critical moments, such as market turning points, acting independently can be a daunting task. For this reason, many great investors have developed exceptionally strong and disciplined personalities.
5. Overconfidence
For some reason, most people seem to view investing as easy. Numerous studies on overconfidence show that the less we know about something, the more we tend to overestimate our abilities.
In fact, investing is hard work. It requires education, experience, diligence and patience.
6. Impatience
Investing means we will not get rewards immediately.
Great investors have always been people who got rich slowly. They themselves have always struggled to resist the temptation of get-rich-quick schemes. They understand that if it is too good to be true, it is not. As each year passes, life seems to move faster, which is why we pay and want to see results immediately. Investing is not like that.
Investing is basically accepting uncertainty by using a portion of your savings to finance a business. It may take years to see the results of that. Investing in quality ideas and letting our capital grow with them is the only way to invest and there is no other alternative.
7. Having Unrealistic Expectations
Rate of return is a fertile ground for the most unrealistic expectations of novice investors. That is also why they are easily fooled by marketing systems that promise unbelievable returns.
Warren Buffett is the greatest investor of our time, and no one can argue with that. Between 1965 and 2011, his reported return was about 20%. Therefore, any investment that returns more than half of his rate of return can be considered good. In the past, he always avoided crazy expectations during the boom of the technology and internet bubble. Many people laughed at him at the time for being too old to do anything. But, in the end, they were the fools.
Conclusion
The key to investing success is buying when the price is cheap. However, doing that is not simple. The 7 concepts that we need to overcome to be successful in investing are:
- Thinking that Someone Can Predict the Market
- Trying to Be Perfect
- Fear of Making Mistakes
- Inability to Act Independently
- Overconfidence
- Impatience
- Having Unrealistic Expectations
P/s: Part of this article was inspired by the author: Colin Nicholson
Editor: TonyCapital Team
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