What does Investor Psychology mean to you?

Question

[quote = Bill Patterson]I actually think it goes quite well in "Investor Psychology". It seems that it has received a lot of back and forth and it has opened the door for the expression of investor psychology that seems to be a bit cynical and elitist. Thanks for the post, Mitch!
Bill

I think this is my first post in the investor psychology forum.  Perhaps it is because I'm comfortable in my own shoes and need little to be motivated when it comes to RE.

Bill's comment above from forum post on "Financial Freedom" got me to thinking, what does investor psychology mean?

Vikram C. · Answer

Charles, when I think of Investor Psychology, I do not think of what might have motivated someone to become an investor.  Instead, I think about the mental qualities that would make someone a great investor.  The qualities to be successful at investing, in my opinion, include:

1.  Being sceptical / cautious when buying,
2.  Being willing to accept your mistakes and learn from them,
3.  Evaluating an investment dispassionately at any given time and not letting the purchase price / costs determine your opinion of the selling price,
4.  Knowing your weaknesses and trying to find ways to mitigate their impact.
5.  Not getting influenced by what others say or what's on CNBC, etc. BUT, at the same time, not taking a contrarian viewpoint just to be contrary.  Instead, your views should be informed by a dispassionate understanding of market conditions.
6.  Being willing to read about and learn from financial and economic history.  Most things have happened before and we can learn from previous experiences even if they were several decades ago.

Matthew Rose · Answer

This question is very basic, lots of angles I guess to answer from, but so far is making a great thread!

As someone who is still treading on the path to financial freedom, I think of it in terms of the right type of goals and mindset required in order to succeed.  Getting clear on what your WHY is for wanting to be financially free, so that when the going gets tough, you still are motivated by a big enough WHY.

Staying focused is another challenge, in order to stay on task and make tangible results in business building, without getting side-tracked too much by business methods or deals that don't fall into line with what you are currently trying to master.

My own personal challenges involve dealing with working a day job, being a husband & father to 2 small children, having a wife who also works (part-time), and an elderly person we take care of (wife's grandma).  Some other big ones are dealing with the 'dream stealers' who just don't understand what it is you are doing or think you are nuts for jumping into something they perceive as abnormal.  That's why I think it's so important to connect with like-minded people for encouragement and team building.  BP is a great way to do that!

It has been a roller coaster ride for me at times, but I am starting to get more clear and determined to keep at it until I succeed.

Honestly, I can't really say on whether or not I am 'passionate' about real estate per se.  Past history has shown me to be very good with creative business strategies, and I have a great sense of accomplishment when plans I make succeed.  REI to me is just another business project, but this time it's run and owned 100% by me!

I do sometimes come across what appears to me to be contradictions with some of the psychology.  For example, in the Secret, talking about the law of attraction, it states that once you envision your goal or what it is you want, and believe that you've already got it, you will receive 'inspired thought', and that you should act on it.  This action, however, supposedly should be something easy to do, because it makes you impassioned and exhilarated.  This seems very different from the other school of thought 'feel the fear, and do it anyway.'  I know for me when acting on opportunities that sometimes appear to have 'manifested' from my intention, I've been shaking in my boots sometimes for fear of screwing something up or not knowing what to say/do, but I still 'do it anyway.'  How can you succeed at anything new unless you are wiling to work through fear?

Sharad M. · Answer

Charles,

To me investor psychology means a few things. It means to always stay focused on your ultimate investment goal. It means to be able to take emotions out of your thought process. It means to always be aware of your ultimate motivation behind your investment goal. It means to be prepared for unexpected. It means to be prepared for the worst case scenario with your decisions. Basically, I invest in real estate, because this is something I am very passionate about. I understand (somewhat) real estate, it gets me excited, making deals gets my juices flowing.

BTW, great question. I really look forward to what others have to say about this.

Greg B. · Answer

I think investor psychology includes different stages just like life.

There is the initial stage of becoming an investor.  Many times people have to work through the fear of just becoming an investor.  They have negative impressions of "investors" from their years of conditioning by their parents and the press.

Once they decide to become and investor the psychology would include what makes them tick.  Why would they make each decision?  Why that investment, why stay with that investment, why bail on that investment?  It may or may not include emotion in the process.

The investor psychology is what makes each of us unique investors and keeps things interesting.

Account Closed · Answer

I believe it's having a financial dream in the form of a tangible vision. (For example, my vision falls in line with Mitch's financial freedom post).  Then making the choice be courageous enough to meet that goal. And then more goals/visions from your new location.

Aaron Mazzrillo · Answer

Simple: How am I going to financially benefit from this transaction?

Jeff S. · Answer

There must be differences in peoples thinking when some need quick results as in flipping while others build slowly through aquisition and hold. The satisfaction of sticking something out long-term is very different and takes a good chunk of life to prove fruitful.

Something I heard once was that it is the same trait that makes some very wealthy that also makes them go broke. Have seen that one play out. Some then recover and some don't.

Account Closed · Answer

Aaron are you saying then that money is the only motivation you have for investing?  Is there really nothing more to it?

It does seem to me that investors must have certain attributes to be successful at investing.  I think that these attributes might even be slightly different based on the type of investing as well.

Someone investing in rental property needs to have a thicker skin, needs to take on a business attitude when dealing with tenants as well as other attributes if they truly want to do well.

Account Closed · Answer

Wikipedia defines psychology as the science of mind and behavior.  I have trouble calling this a a real science, but I understand that there are those that consider it a science.

So by this definition investor psychology is about understanding the investor mind and behavior.  Vikram the attributes you describe are certainly important attributes that would set an investor apart and increase the likelihood of their success.

Seems to me that motivation is apart of this, understanding what makes for a good investor and how to become successful at investing.

I always hate to pigeonhole anyone because it seems to me the most successful are those that have been different, been creative and been willing to go against main stream thinking.

Account Closed · Answer

Many very interesting comments on what investor psychology is.  I ask because I have also thought of it as basically looking at an investors motivation and trying to understand that thought process.

I can see real value in clearly identifying in your own mind why you invest and what drives others to invest.

There are probably many other angles and I would love to hear further thoughts on the subject.  It is an area that I haven't really explored much.