PDF Ebook Investment Psychology Explained : Classic Strategies to Beat the Markets
X"or most of us, the task of beating the market is not difficult, it is the job of beating ourselves that proves to be overwhelming. In this sense, "beating our-selves" means mastering our emotions and attempting to think independently, as well as not being swayed by those around us. Decisions based on our natural instincts invariably turn out to be the wrong course of action. All of us are comfortable buying stocks when prices are high and rising and selling when they are declining, but we need to develop an attitude that encourages us to do the opposite.
Success based on an emotional response to market conditions is the result of chance, and chance does not help us attain consistent results. Objectivity is not easy to achieve because all humans are subject to the vagaries of fear, greed, pride of opinion, and all the other excitable states that prevent rational judgment. We can read books on various approaches to the market until our eyes are red and we can attend seminars given by experts, gurus, or anyone else who might promise us instant gratification, but all the market knowledge in the world will be useless without the ability to put this knowledge into action by mastering our emotions. We spend too much time trying to beat the market and too little time trying to overcome our frailties.
One reason you're reading this book is that you recognize this imbalance, but even a complete mastery of the material in these pages will not guarantee success. For that, you will need experience in the marketplace, especially the experience of losing.
The principal difference between considering an Investment or trading approach and actually entering the market is the commitment of money. When that occurs, objectivity falls by the wayside, emotion takes over, and losses mount. Adversity is to be welcomed because it teaches us much more than success. The world's best traders and Investors know that to be successful they must also be humble. Markets have their own ways of seeking out human weaknesses. Such crises typically occur just at the crucial moment when we are unprepared, and they eventually cause us financial and emotional pain. If you are not prepared to admit mistakes and take remedial action quickly, you will certainly compound your losses. The process does not end even when you feel you have learned to be objective, patient, humble, and disciplined, for you can still fall into the trap of complacency. It is therefore vitally important to review both your progress and your mistakes on a continuous basis because no two market situations are ever the same.
Some of the brightest minds in the country are devoted to making profits in the markets, yet many newcomers to the financial scene naively believe that with minimal knowledge and experience, they too can make a quick killing. Markets are a zero-sum game: For every item bought, one is sold. If newcomers äs a group expect to profit, it follows that they must battle successfully against these same people with decades of experience. We would not expect to be appointed äs a university professor after one year of undergraduate work, to be a star football player straight out of high school, or to run a major Corporation after six months of employment. Therefore, is it reasonable to expect success in the investment game without thorough study and training? The reason many of us are unrealistic is that we have been brainwashed into thinking that trading and investing are easy and do not require much thought or attention. We hear through the media that others have made quick and easy gains and conclude incorrectly that we can participate with little preparation and forethought. Nothing could be further from the truth.
Many legendary investment role models have likened trading and investing in the markets to other forms of business Introduction endeavor. As such, it should be treated äs an enterprise that is slowly and steadily built up through hard work and careful planning and not äs a rapid road to easy riches.
People make investment decisions involving thousands of dollars on a whim or on a simple comment from a friend, associate, or broker. Yet, when choosing an item for the house, where far less money is at stake, the same people may reach a decision only after great deliberation and consideration. This fact, äs much äs any, suggests that market prices are determined more by emotion than reasoned judgment. You can help an emotionally disturbed person only if you yourself are relatively stable, and dealing with an emotionally driven market is no different. If you react to news in the same way äs everyone eise, you are doomed to fall into the same traps, but if you can rise above the crowd, suppressing your own emotional instincts by following a carefully laid out investment plan, you are much more likely to succeed. In that respect, this book can point you in the right direction. Your own performance, however, will depend on the degree of commitment you bring to applying the principles you find here.
At this point, clarification of some important matters seems appropriate. Throughout the book, I have referred to traders and Investors with the male pronoun. This is not in any way intended to disparage the valuable and expanding contribution of women to the investment community but merely to avoid "he or she" constructions and other clumsy references. In the following chapters, the terms "market" or "markets" refer to any market in which the price is determined by freely motivated buyers and sellers. Most of the time, my comments refer to individual Stocks and the stock market itself. However, the principles apply equally, regardless of whether the product or specific market is bonds, commodities, or Stocks.
At this point, clarification of some important matters seems appropriate. Throughout the book, I have referred to traders and Investors with the male pronoun. This is not in any way intended to disparage the valuable and expanding contribution of women to the investment community but merely to avoid "he or she" constructions and other clumsy references.
In the following chapters, the terms "market" or "markets" refer to any market in which the price is determined by freely motivated buyers and sellers. Most of the time, my comments refer to individual Stocks and the stock market itself. However, the principles apply equally, regardless of whether the product or specific market is bonds, commodities, or Stocks.
All markets essentially reflect the attitude and expectations of market participants in response to the emerging financial and economic environment. People tend to be universally greedy when they think the price will rise, whether they are buying gold, cotton, deutsche marks, Stocks, or bonds. Conversely, their we also know that this is far easier said than done. We will examine why this is so, and we will learn when contrary opinion can be profitable and how to recognize when to "go contrary."
Part III examines the attributes of successful traders and investors, the super money-makers—what sets them apart from the rest of us and what rules they follow. This Part also incorporates many of the points made earlier to help you set up a plan and follow it successfully. To solidify and emphasize the key rules and principles followed by leading speculators and traders in the past hundred years or so, I have compiled those guidelines followed by eminent individuals. While each set of rules is unique, you will see that a common thread runs through all of them. This theme may be summarized äs follows: Adopt a methodology, master your emotions, think independently, establish and follow a plan, and continually review your progress.
This recurring pattern did not occur by chance but emerged because these individuals discovered that it works. I hope that it can work for you äs well. All that is needed is your commitment to carry it out.
Contents
Introduction
PART I KNOWING YOURSELF
- 1. There Is No Holy Grau
2. How to Be Objective
3. Independent Thinking
4. Pride Goes Before a Loss
5. Patience Is a Profitable Virtuc
6. Staying the Course
PART II THE WALL STREET HERD
- 7. A New Look at Contrary Opinion
8. When to Go Contrary
9. How to Profit from Newsbreaks
10. Dealing with Brokers and Money Managers the Smart Way
PART III STAYING ONE STEP AHEAD
- 11. What Makes a Great Trader or Investor?
12. Nineteen Trading Rules for Greater Profits
13. Making a Plan and Sticking to It
14. Classic Trading Rules
Bibliography
Index
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PDF Ebook Investment Psychology Explained : Classic Strategies to Beat the Markets
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