The first emotion that erodes investor achievement is the desire for money.
Especially when this desire turns into greed. Most people invest with the goal of making money. (Some people see investing as intellectual training or as a way to demonstrate their competitiveness, and for them, money is also a measure of success.) Money itself may not be everyone's goal, but it is a measure of people's wealth. People who don't care about money usually don't invest. )There's nothing wrong with working hard to make money. In fact, the desire for profit is one of the most important factors driving the market and the overall economy. Danger arises when desire turns into greed. For greed, Merriam-Webster defines it as "excessive or unrestrained possessiveness toward wealth or profit, which is usually condemnable."
Greed is an extremely powerful force. It is powerful enough to override common sense, risk aversion, caution, logic, painful memories of past lessons, determination, fear, and all other factors that might keep investors away from trouble. Conversely, greed often drives investors to join profit-seeking crowds and ultimately pay the price.
The combination of greed and optimism drives investors to repeatedly pursue low-risk, high-return strategies, buying hot stocks at high prices and holding onto them with the expectation of appreciation when prices have already surged. Only afterwards do people realize the problem: expectations are unrealistic, and risks are overlooked. (From 'Wisdom Gained Afterwards' to 'Foresight', October 17, 2005)
The second factor affecting investment is fear.
Corresponding to greed is fear—the second psychological factor we must consider. In the investment world, this term does not represent rational or wise risk avoidance. On the contrary, fear, like greed, means excess. Therefore, fear is more like panic. Fear is excessive worry that prevents investors from taking the proactive actions they should take.
The third factor is the tendency for people to abandon logic, history, and norms.
Much of my career, I've been amazed at how easily people voluntarily let go of doubt.
This tendency makes people willing to accept any questionable proposal that could make them wealthy...... As long as it makes sense, that's enough. In response, Charlie Munger quoted a quote from Demosthenes for a brilliant comment: "Deceiving oneself is the simplest thing, because people always believe what they hope for." "The belief that certain fundamental limiting factors no longer work—and therefore fair value no longer matters—is at the core of every bubble and the subsequent collapse.
But the purpose of investing is serious and does not allow for jokes; we must persistently stay alert to things that do not work in reality. In short, a lot of skepticism is needed during the investment process...... Doubting inadequacy can lead to investment losses. When analyzing financial disasters afterward, two phrases repeatedly appear: "So good it doesn't seem real" and "What are they thinking?"
What makes investors so captivated by this illusion? The answer is usually that investors, driven by greed, easily discard or ignore past lessons. In the words of John Kenneth Galbraith, it is the "extremely brief financial memory" that prevents market participants from realizing the recurrence and inevitability of these patterns.
When a market, individual, or investment technique gains short-term high returns, it often attracts excessive (blind) worship. I call this method of obtaining high returns the "Silver Bullet." Investors are always searching for silver bullets, calling them the Holy Grail or Free Lunch. Everyone wants a ticket to wealth without risk. Few question whether it exists or why they should get it. No matter what, hope is always growing.
However, silver bullets do not exist; no strategy can deliver high returns without risk. No one knows all the answers; we are just people. The market is constantly changing, and like many other things, the chance to gain unexpected profits diminishes over time. Belief in the existence of silver bullets will ultimately lead to destruction. (The Realist's Creed, May 31, 2002)
What led to the belief in silver bullets? Initially, there was usually a certain factual basis, which was developed into a grandiose theory, and believers began lobbying everywhere. Subsequently, this theory brings short-term profits, whether because the theory itself has some value or simply because the buying behavior of new believers drives up the price of the target asset. In the end, two appearances appear: first, there is a way to obtain inevitable wealth; Second, the effectiveness of the method sparked a frenzy. As Warren Buffett said in Congress on June 2, 2010: "Persistently high prices are like a drug that affects the reasoning ability of all levels." "But in hindsight—after the burst—this frenzy is called a bubble.
The fourth psychological factor causing investor errors is conformity (even when group consensus is obviously absurd) rather than sticking to one's own views.
In his book How the Market Fails, John Cassidy describes the classic psychological experiment conducted by Professor Solomon Ashe of Swarthmore College in the 1950s. Axi asked the test group to make judgments about what they saw, but only one person in each group was tested; the rest were childcare. Cassidy explained, "Such a setup puts the real subject in a dilemma: as Ash said, 'We exert two opposing forces on him: his own feelings and the group's unanimous opinion.' ’”
The actual test subjects were very likely to ignore their own observations and align with their peers, even when others were clearly wrong. This experiment demonstrates the influence of groups and inspires us to be cautious about the correctness of group consensus.
"Just like the participants in Solomon Ashe's visual experiment in the 1950s," Cassidy wrote, "many who disagree with market consensus will feel excluded." In the end, the ones who truly go crazy are those who don't understand the market. Time and again, the pressure of herd and the desire to make money lead people to abandon their independence and skepticism, forsaking their innate risk aversion and believing in meaningless things. This happens very frequently, so it must be some inherent factor rather than random one at work.
The fifth psychological impact is jealousy.
No matter how strong the negative power of greed is, it also motivates people to be proactive, and compared to others, its negative impact is even greater. This is what we call the most harmful aspect of human nature.
A person who feels happy in isolation may become distressed when they see others doing better. In the investment field, most investors find it hard to sit by and watch others make more money than they do.
I know of a nonprofit organization whose endowment fund yield from June 1994 to June 1999 was 16%, but its peers' average annual return of 23% disappointed investors. Endowments without growth stocks, tech stocks, acquisitions, and venture capital have lagged behind development over five years. But as tech stocks crashed, from June 2000 to June 2003, the institution had only a 3% annual return (during which most endowments suffered losses), and shareholders actually became more enthusiastic.
Such results are definitely problematic. How can people earn 16% a year and be unhappy, but earn 3% and actually feel happy? The answer is that we all have a tendency to compare ourselves to others, and this tendency can negatively affect what is supposed to be a constructive and analytical investment process.
The sixth key factor is arrogance.
Remaining objective and cautious in the face of the facts I am about to state below is extremely challenging. Evaluate and compare short-term investment performance.
During boom periods, rash or even mistaken decisions that take on greater risks often yield the best returns (we are mostly in a boom period). The best returns bring the greatest self-satisfaction. If things really go as hoped, then being smart and recognized by others is a joyful thing.
In contrast, thoughtful investors work quietly and hard, earning stable returns in good years and bearing lower losses in bad years. They avoid high-risk behaviors because they are very aware of their shortcomings and often reflect on themselves. In my view, this is the best rule for creating long-term wealth—but it won't bring much self-satisfaction in the short term. Humility, prudence, and risk control are not as glamorous. Of course, investing shouldn't be associated with glamour, but it is often a form of glamour art.
The seventh influencing factor is called compromise, a characteristic of investment behavior that typically appears late in the cycle.
Investors will do their utmost to stick to their beliefs, but when economic and psychological pressures become irresistible, they give up and follow the crowd. Generally speaking, those entering the investment industry are exceptionally smart, knowledgeable, knowledgeable, and skilled in calculations. They are well-versed in the subtleties of business and economics, and understand complex theories. Most investors can reach reasonable conclusions about value and prospects.
But psychological factors and group influences also intervene. Most of the time, assets are overvalued and continue to appreciate, or undervalued and continue to depreciate. Ultimately, this tendency can negatively affect investors' psychology, beliefs, and determination. The stocks you give up are making money while others are making money; the stocks you buy are depreciating; and concepts you consider dangerous or foolish—hot new stocks, high-priced tech stocks with no returns, and highly leveraged mortgage derivatives—are promoted and spread day after day.
As stocks priced too high perform better, or underpriced stocks continue to fall, the right approach becomes simpler: sell the former, buy the latter. But people don't do that. The tendency toward self-doubt mixed with rumors of others' success forms a powerful force that causes investors to make poor decisions, and as this tendency persists for a long time, the strength of this force also increases. This is another force we must confront.