Psychology

I do read some investment boards. In fact, I get my best ideas there. That there should be good ideas there it is not surprising: a lot of those people are really quite smart. But by and large they aren’t successful. Their biggest problem is psychological: the inability to resist the urge to sell. First, people seem psychologically unable to withstand temporary adverse market movements. This leads them to take losses, when what they should have done is bide their time and waited for the price to recover. If you have done your research and have come to a firm opinion as to why something should go up, and nothing has happened to change your opinion, why should you waffle just because it goes down instead? (Presumably people waffle because the price movement seems to indicate that other people disagree with one’s own analysis. But then other people just could be fools – the same fools who had made the asset cheap in the first place are perhaps now making it cheaper yet). Second, people seem too eager to take profits. They buy something at 60 convinced that it should go to 120; but as soon as it goes to 70, they sell. I have seen many of these guys press the sell button after a 10% gain on things which I sold several months later 50 or even 80% higher. Things about which one is pretty sure they will go up this much are really rare – they are a gift – it is a waste to dump them for a 10% gain.