Greetings to all lovers of finance and investment! Today I want to tell you about, how not to succumb to the influence of the crowd, make objectively correct decisions and remain rational in the stock market.
How to be smarter than the market?How to be smarter than the market?
What is the most important thing in investment? …Knowledge? The money? Or maybe power? All this is very important, but it is impossible to know everything (although you need to strive for, to know more, than others), not everyone has money, and power is available only to the elite.
Psychology is among the most important factors for success in investing.. Psychology Discovers Truly Amazing Facts and Unbelievable Possibilities. People are often extremely irrational in their actions and decisions., if they face a choice, but influenced from outside. Prominent psychologist and economist Daniel Kahneman received this influence in his book Think Slowly, decide quickly " (I recommend) gives an interesting example.
You go to the show with a ticket for 3 000 rub. Here you come and understand, that you lost your ticket. Pay more 3 000 for a new ticket? And the second situation: you decided to go to the play and buy a ticket on the spot. Arriving at the checkout, understood, what have you lost 3 000 rub. Go to the play, buying a ticket?
These situations are similar to 100% economically. In either case, your loss 3 000 rub. But according to the survey, more people refuse to buy a second ticket in the first case, but they buy a ticket in the second. It seems to them, that they overpay in the first case double the price for the ticket, whereas in the second case, they do not associate the purchase of a ticket and the loss of money. Ie. "Profitability" (if I may say so) buying a ticket in the second case is not associated with a loss of money.
This effect negatively affects making the right investment decisions.. People have different attitudes towards the risk of losing a lot of money and the opportunity to earn the same amount.. Simply put, people prefer more risky deals, if there is an opportunity to win a lot of money, even if she is scanty. That is why lotteries are very popular among the population..
A striking example. You are investing in shares of a small company, and your chances of earning 10 million. rub. constitute 90%. With probability 10% you will lose all your invested money. And now the question: will you agree to resell your shares for 8,5 million. rub.? Most people prefer not to take risks and guarantee themselves big profits and resell shares.. But if you get acquainted with mathematics, or rather, with such a concept as the mathematical expectation, then you can calculate the potential return on investment in the mentioned company: 10 * 90% + 0 * 10% = 9 million. rub. In simple language, return on investment is higher than return on resale of shares (because. 9 million. > 8,5 million)
Now the situation is reversed. You also invested in a small company, but later things went badly for the company. Now with probability 90% you will lose 10 million. rub. only 10% on it, that the situation will improve, and you will return the invested capital. An investor appears, ready to redeem your shares for 8,5 million. rub. Sell? The vast majority of people refuse such a deal in the hope that, that the situation will improve. think, plus or minus 1,5 million. losses, and so at least there is a chance to recapture your.
But again, math says otherwise.. The potential investment loss is 9 million. rub. (10 * 90% + 0 * 10%). And they offer to lose less - 8,5 million. But most people turn out to be irrational..
Output: many overestimate the likelihood of an unlikely event (big win) and underestimate the risk of large losses. Therefore, the lotteries noted above are so popular.. Scientifically speaking, then the mathematical expectation of winning there is less than the cost of the ticket. The same principle in bookmakers, casino, Forex. Also this effect can be observed, when people buy shares of bankrupt companies for pennies or high yield bonds (VDO) hoping to get super profit, forgetting about even greater risk.
There are also contextual effects when good or bad news or company reports are released.. Often, stocks biasedly skyrocket on unexpectedly good news or fall excessively on bad news..
For these reasons, I try to invest objectively and treat the situation soberly., not making spontaneous decisions. And of course I avoid adventurous stories and high-yield capital investments..
Be smarter than the market.
And to definitely be smarter than the market, pay attention to my investment course in the form Books (with helpful Excel spreadsheets and personal advice), where I collected everything in an understandable and accessible form, what I know myself and what helps me to invest successfully.
Even more useful information about investments and finance in my Instagram – @long_term_investments . Subscribe!
