#009: Psychology In Investing
Be greedy when others are fearful and be fearful when others are greedy.
Hi Friends,
Welcome to another issue of my newsletter.
How are you all doing??
I spent the weekend away from school, traveling down home for a wedding, and spent time with my extended family. I am currently in an excellent mood.
On a former issue, I started my investing philosophy. Today we continue from there.
Moving on, I believe investing has more to do with human psychology than mathematics.
Imagine a future where robots make all the investment decisions in the stock market. There really won’t be room for error or sentiments. But that would mean that every robot would ultimately be doing the same thing as the other.
Assuming they are of the same efficiency and the market is perfect.
Now the above example is utopian at best.
Coming to the real world, we have different people making decisions with different perspectives on almost the same information.
Like the tale of the three blind men and the elephant, investing would be different.
There would be human errors, and these are the same errors other people would take advantage of and make some gains.
When you understand human behavior and what influences it, you stand to gain from the mistakes humans make.
Like Warren Buffet said,
be greedy when others are fearful and be fearful when others are greedy.
For example, I had a realization a while ago that almost all instruments of investment are bubbles. While this is not outrightly correct, all investment vehicles go through up and down, which is usually the best time to observe how humans behave.
Anything on a big wave might not necessarily be good, but you almost certainly make some bucks if you jump in early enough. How ever, if you jump late, you get first to enjoy the ride down before it eventually goes up(if it ever goes back up)
This can be explained as the greater fool theory.
When the prices of investment vehicles are low, that is a chance to acquire great value at a low price.
While understanding that human behavior could give you an edge over your counterparts, remember to not fall into the Dunning-Kruger effect.
Readings
Trees are the Root of all Evil
The blind men and the elephant
Pictures
Tools
PS: Currently writing this and tasting camel milk at 00:35 WAT
That wraps it up for the week. See you next week.