What does it take to succeed as an investor? That’s a broad question but nonetheless a supremely important one. Let’s stop, think about this for a minute and see if we can boil it down to a few core elements. First off, it takes genuine curiosity. It requires a thirst for knowledge, a willingness to continually seek out education and expand your intellectual capital. This is the learning part of the equation. I’m confident that you have this checkbox covered because you’re displaying that curiosity right now just by reading this blog. You’ve come here to satisfy that thirst for knowledge, hoping to learn something new or uncover something insightful. So what’s next?
Well, it takes an analytical mind. Despite what the pessimists say, investing isn’t a game of darts at the bar down the street. Successful investors don’t simply throw aimlessly at the board hoping that something sticks, and you don’t either (hopefully…). This game takes calculated investigation, thorough research and attention to detail. It requires you to dig deeper than the latest headlines or the “hottest stock” on the business news channels. The good news is that, just like the curiosity checkbox, I’m fairly certain you’ve got this one covered as well. You’re here on StockCharts.com, a website dedicated to the analysis of financial charts. You clearly respect the value of careful and precise research and appreciate the central role that it plays in your investing success. For that I commend you.
On top of the first two elements, a successful investor must also cultivate an ability to tolerate risk. More importantly, he or she must accurately –– and honestly –– determine his or her personal risk tolerance. Risk management is a key aspect of profitable portfolio management, but understand, it’s risk “management”, not risk “elimination”. The best investors embrace statistical probabilities and are therefore able to adopt a more comprehensive, big picture view of their total investing results. They recognize that even if they cross all the t’s and dot all the i’s, some loss is simply an inevitable part of investing. Done right, the highs will outnumber the lows, but that doesn’t mean that the lows will disappear. Successful investors understand what it means to control risk, and they build their portfolio management strategies around those realities.
From a very broad perspective, that’s a strong list. Successful investors are intellectually curious and constantly seeking educational opportunities. They are analytical and appreciate the value of thorough research. They understand their own risk tolerances and use that self-awareness to develop robust portfolio management strategies uniquely tailored specifically to them. You check all three of those boxes and you’ll be well on your way to some pretty impressive returns.
But, at the end of the day, is this it? Have these three points effectively boiled it all down to represent what it takes to succeed as an investor? I’d like to think that they’ve done a good job and that this is enough, but there’s a fourth element we need to examine. That fourth element considers the realities of our human brain, the basic psychology that shapes the way we perceive, judge and make decisions in the world around us. Experienced investors know that investing is a challenge of the mind. It tempts our senses, stimulates all corners of our intellect and evokes each and every possible feeling across our remarkably-wide spectrum of emotions. As an investor, you are battling the markets, yes, fighting to take control of your portfolio, of course, but you are also wrestling the innate tendencies of your own human mind to think, judge, and behave in irrational ways that often violate sensible logic, sound reason or good judgement. These tendencies are called Cognitive Biases, and their relevance to the actions of the modern investor is undeniable.
Take, for example, the tendency known as Confirmation Bias, which describes our propensity to overweight, favor, seek out, exaggerate or more readily recall information or alternatives in a way that confirms our preconceived beliefs, hypotheses or desires, while simultaneously undervaluing or ignoring information that disproves our preconceived beliefs, hypotheses or desires. As an investor, it can be difficult to maintain a separation between informed estimates or expectations and emotional judgments based on hopes or desires. By causing us to overweight information that confirms such hopes or desires, Confirmation Bias can affect our abilities to make sound assessments and form well-reasoned opinions about, for example, a stock’s upside potential.
Now, I’ve carried on long enough in this blog, so rather than attempting to cover an entire field of psychology and behavioral finance in one short piece, I’ll instead direct you to our new ChartSchool article on Cognitive Biases. I encourage you to give it a thorough read and consider how the eleven common tendencies discussed in the article apply to your own investing. The first step towards combating the unwanted effects of these psychological biases is recognizing and understanding them, and while some tough-to-swallow honesty might be necessary here, I assure you that the insights and observations you’ll gain will be transformative.
In addition to the ChartSchool article on Cognitive Biases, I will be giving an expanded presentation on this very topic in September at our recently-announced ChartCon 2016! With a long list of sensational presenters and an all new, more-accessible online format, this year’s conference quickly is shaping up to be the most exciting ChartCon yet. For more information on the conference, or to register now, click here.
Trade with purpose, trade with poise.
- Grayson Roze