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Human Psychology Determines Success or Failures in Stock Investing

Nothing can match the opportunities, excitement, joy, fear, and defeats, associated with stock market investing. It can make or break the life of an investor in no time. Here opportunities are fathomless, risks are galore too. To become successful in this market, merely sound knowledge about the market does not suffice. It requires out of the box psychological traits to emerge out as a winner. If you go by the rumors and follow what others are doing, chances are there that you may lose out in the end.

But this is not to discourage you from investing in equities. This is more so because this is the market which has given birth to the legendary investors such as Warren Buffet or Mark Mobius. Intelligence apart, his emotionless adherence to value investing philosophy has made Warren Buffet, the Oracle of Omaha, one of the wealthiest persons in the world. It is not his hunger for money, but some unique psychological traits that have made him a billionaire investor. Again, the unmatched ability of Mark Mobius, who is also known as the “Pied Piper of Emerging Markets,” to correctly gauge the emerging market psychology, has helped him amass huge wealth.

But the instances of Warren Buffet and that of Mark Mobius are exceptional. Majority of you are however very prone to behave very predictably and can’t get the best out of the stock market investing. There are certain typical psychological characteristics which come in your way accumulating wealth from stock market investing.

The basic rule for successful stock investing is to buy low and sell high. This looks pretty simple and straight. But still many of you make mistakes while following this rule. Your psychological instincts force you to purchase stocks when the prices are high and to sell them off when the prices are down. Here we try to explain the psychological reasons behind this irrational exuberance.

Scarcity of things
Scarcity of a particular product is a very important reason which determines human moves. It is a natural psychological tendency to desire the things which are scarce in supply. The more scarce a product, more will be its value since only a few will be able to possess it. This holds true in stock market investing too. For instance, say, you have jumped into purchasing stocks with $20. In this situation, you may think that the in short time the stock will not be available at $20. You may be under the perception that price of that stock will soon go up to $25 or $30. This psychological trend is more pronounced when the market is on a rising spree. In other words, you are purchasing a stock when the prices are actually rising.

Following others
It is a typical human psychology to imitate what others are doing. You decide your best course of action by following what the others are doing. If you see people around you wearing jackets, you think that winter has set in and you too also start wearing jackets. This particular psychology is also reflected in your stock market investment behavior. If you see people making money by investing in a particular stock, you also start investing in that stock. When many of you start purchasing that stock, price of that stock goes up. So, you actually buy a stock whose price is actually rising. Again, if you see people around you selling a particular stock so as to reduce loss, you also start selling that stock. When many of you start selling that stock, its price decreases. So you are actually selling a stock whose price is falling.

So, because of these two psychological reasons of scarcity and following what others are doing, you make the wrong move of buying high and selling low. This ultimately results into losses for you. There are certain ways to contain this irrational psychological behavior so as to emerge out as a successful investor.

Think rationally before making any move
It is seen that whenever you become very much emotional or passionate about a particular stock, you make wrong moves. This also happens when you become emotionless or dispassionate about a particular stock. In this case also, chances are quite high that you may make loss. The best approach would to be unbiased to all the stocks. You need to treat all the stocks equally. Another thing that you must avoid is to make any hasty decision. If you make hasty decisions, in most of the cases you have to regret later on. You need to keep your cool and emotions under control and should have proper investment strategy in place so as to become a successful investor. Importantly, it would be wise to view stock market as long term investment strategy. It has been proved time and again that over the long run stock market offers better returns than any other form of investment.

Keep it in mind that utility of a product remains the same
In order to avoid being driven by the power of scarcity, you need to remember that utility of an item remains the same. In fact the item that you desire to have more than ever, does not change fundamentally. The utility derived from an item does not change but your need to possess it does change. As a stock investor, you may be interested to make short term gains or long term gains. Depending upon whether you want to make short term or long term gains, you need to put in place appropriate investment strategy.

The above discussion will surely help you understand the psychological behavior required to emerge out as a winner in stock market investment. You need to understand that your greed, hasty decision, imitative nature can prevent you from making money through investing. Mere intelligence and knowledge about the market are necessary but not sufficient conditions to become a successful stock market investor. It requires some unique and sagacious psychological traits to become successful as a stock market investor.