What is the most important quality of a successful Investor?
Investing is a phycological marathon. In order to run the race, we have to be psychologically stable. Investors have to first understand that, only having high intellectual strength may not help in achieving success in investing journey. As Warren Buffet says,” we don’t need high-level IQ in order to win the game of investing because investing is the game of temperament and stable mind”. One of the greatest obstacles that investor face in their journey, is their own behavior and unnecessary emotions in markets.
Imagine a situation where a monkey is operating a mobile phone. Monkey may be doing some random things with a phone but once when the phone rings, the monkey will get fearful and it will throw the phone or move away from the phone because the monkey’s mind is not designed to operate a mobile phone. Monkey’s mind will not be ready to accept the fact that, all phone rings and ringing sound is not a problem but rather it’s the feature of the phone. Likewise, a human’s mind is not well developed to operate in the market environment.
The first step in improving our behavior towards the market is by acknowledging that we are not perfect in taking rational decisions. Only when we know our mistakes, we will be able to rectify it.
The human mind doesn’t like uncertainty but the market environment is full of uncertainties and their lies a big problem.
Loads of data and information are bombarded every day into an investor’s mind regularly. an intelligent investor must be able to clearly distinguish between noise and signal. An investor needs to understand their own behavior first rather than understanding the market to achieve financial success.
Investors need to understand that, their emotions and biases they have towards the markets, have a strong correlation to their portfolio return. The first step in improving our emotion and the phycological defect is by identifying them. Investors need to address their own biases and phycological defects in order to correct them. One of the most commonly spread phycological defect is Social Proof Conformity.
Social Proof Conformity
We know that investors are always working under uncertain environment and so it becomes merely impossible to take correct decisions all the time. So, when investors take some crucial decisions in the market, we seek confirmation from other market participants. For example, if we decide to invest in certain companies, investors generally look around in the market who else is buying this company. if some great investor is buying the same stock we are buying, we may get overconfidence in our investments. The main problem with social proof conformity is that investors are been unknowingly influenced by another people reaction.
Investors must know that we are influenced by market participants whose face itself we haven’t seen. If investors feel that, they need social conformity in everything we do in the market then the result would be disastrous.
How to overcome social conformity
Be an independent thinker
Investors take good decisions when we think independently. Independent thinking is a powerful technique that investors must cultivate in order to make good financial decisions. This does not indicate that we should not accept any new ideas which come in our way. We may accept and analyze what others are doing in the market but the ultimate decisions must be taken by us.
As Buffet says,
Thinking independently is the secret of successful investing. Thinking independently is counterintuitive to human nature because human’s mind has evolved only by social proof conformity. The human mind follows herd behavior and it is very difficult to go against the crowd. So when investors develop the habit of independent thinking, they are miles ahead of their competitor. This seems to be a simple technique but thinking independently is not so easy in real life environment because of a lot of noise surrounding us. as Buffet says, if we are not able to sit quietly in a room and think independently and then come to any conclusions, then the market is not for you.