The Psychology of Trading (2) - Dare to be Dull

The point I want to convey here is stock investing or trading does not have to be sexy and excited. Even some market experts are saying that exciting investments are more often than not are a bad deal. When you seek entertainment or excitement in your stock trading is liable to lead you to poor result.

According to William Bernstein, in his book The Four Pillars of Investing, one of the most deadly investment traits is the need for excitement.

"One of the most consistent findings in behavioral finance is that people gravitate towards low-probability/high-pay-off bets. For example, it is well known among professional horse race bettors that is much easier to make money on favorites than on long shots. The reason is that the amateurs tend to prefer long shots, making the odds for the remaining favorites more advantageous than they should be."

I, personally, trapped once in this situation. When the market is hyped, and the stock I had been watching, was showing a good uptrend sign, even though my system gave no buy signal. I got excited! I bought it and I sold it a few weeks later at loss. I should have understood that I should not trade for excitement.

CC Image courtesy of ota_photos on Flickr

Key takeaway:

#1. The most exciting assets tend to have the lowest long term returns, and the dullest ones tend to have the highest. If you find yourself stimulated in any way by your portfolio performance, then you are probably doing something very wrong.

#2. The exciting investments are highly likely the ones that attracts a lot of public attention and hence will be over-owned. This means this drives up the price, lowering you potential future returns.

#3. Stick to your trading plan. Eliminate emotion as much as you can. Follow your trading plan and rules religiously.

The Psychology of Trading (1)