To Succeed in Investing, Don’t Become Fixated by Your Own Success

What follows is a true and factual story. A University in the US did an experiment to understand more about the psychology of success. This experiment has subsequently been repeated a number of times at different places and by different people.

The experiment is straight forward. It asked people to guess the outcome of tossing a coin. The outcomes are either heads or tails and you guess the outcome and then you are either right or wrong.

On probability, if the coin is tossed you have a 50% chance of guessing correctly which way it will end up. The experiment required 500 tosses of the coin and the outcome followed the laws of probability of around half of the tosses producing a correct guess. This probability outcome is fairly well understood by the experiment subjects, and people generally.

However, within the 500 tosses you will have a good chance of stringing together a number of tosses in a row that you will guess correctly. This is where the psychology of success comes into effect. The experiment asked it’s subjects how they felt about their performance in tossing the coin and guessing the correct outcome at various times during the experiment.

What the experimenters discovered was that when people were having successful runs – four or five or six correct guesses in a row – they developed a belief that their own skill and expertise was responsible for this success. Reasons stated included: I am now concentrating harder and that is improving my performance, I am getting better at this; through to, I have developed the skill of how to guess a coin toss more accurately.

Remebering that the experiment subjects were fully aware of the law of probability at work in the experiment, with a likelihood of 50% of the outcomes being correct and 50% of the outcomes being incorrect, but believed that their talent and/or ability was attributing to their success. Quite disturbing in its contradiction.

Yet this happens with people investing in the stock market all the time – especially people new to investing and trading. After a winning trade or two or three, the investor or trader begins to believe that they have a special “talent” for stocks and shares. They begin to believe that they are naturally better than the average trader.

The outcome, before too long, is that the investor’s belief in their own ability results in over confidence. This over confidence results in trading too many stocks or trading without managing the risk inherent in any trade. Unfortunately the stock market has a nasty habit of slapping down over confident traders with a big loss.

So remember, every trade you take has risk which you need to manage. If you manage your risks and enjoy the chance string of winning trades from time-to-time you will be successful and you will avoid the Market Slap!

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Steps To Avoid Risky Trading Strategy

Stock markets are the most risky way to make money. However, that said they are easily most easily available methods to make money and they provide gains which are far in excess of any other money making methods.

There are two ways you can trade stocks in the market. The first one is by opening an account with a stock broker and the second one is by investing in mutual funds. These mutual funds have managers which will invest the money given by you as an investor. The risks are the same in the mutual funds as there are in the stocks.

Invest in the stock market for long term to avoid risk. If you are a risk taker then only invest in the stock market for short term.

Once you have the long term perspective in mind then you can invest in stocks which are the most the most defensive or the most risky.

The most risky stocks are those which can give you gain instantly but the issue with them is that you need to monitor those very closely so that you can exit the stocks as and when you have made your desired percentage of gains.

If you have time to monitor the stocks only then invest in short term stocks else go for the long term stocks.

Have a safety net for losses otherwise you can be caught on the wrong foot and there will be no money left for you to pick good stocks later. Buy when everyone is selling and sell when everyone is buying is the mantra that you should follow and that will help you make a lot of money.

Before entering the market make sure that you know what is your risk profile and this risk profile will come in handy while taking any risk in stock market.