‘Know Thyself’.

Socrates.

How well do you really know yourself? Allegedly 80% of people consider themselves to be ‘above average’.  You can learn a lot just from that. 

When thinking about investing, understanding your real behaviours especially under pressure and when dealing with ambiguous situations can both save you a lot of money and also give you a real advantage over the stock market in general when buying and selling shares.

Here’s how. 

1.     Behaviour Modification

Psychologists would probably make very good investors if they were inclined to. The reason for this is that they have an appreciation for both human behaviour and how to modify it.

In understanding your own strengths and weaknesses and appraising yourself honestly, even when you don’t like the truth, you will give yourself a big advantage in your investing career. If you have a natural tendency to follow the crowd, you can modify your behaviour and recognise when you are behaving rationally, and irrationally, and in doing so minimise your chances of irrationally selling shares at a loss.

Understanding your behaviour is as important when investing in stocks and shares as understanding business.

2.     Know What You Don’t Know

Understand the limits of what you know and stick to your sphere of competence. Buying shares in a sector or business you know nothing about and cannot understand is not good advice. Sticking to investments that you can understand will provide you with a greater margin of safety.

3.     Understand Your Attitude Towards Risk

If you are to beat Mr Market and do well buying and selling shares you will need to both understand your own attitude towards managing exposure to risk, as well as understanding what risk is.

In doing so you will learn how to modify your behaviour in stressful situations and assess rationally what the risk is, and what the rational way forward is. Selling because everybody else is may not be a wise move.

Imagine buying £1000 in shares in a particular company only to see it reduce in value within a month to £8000 whilst there is every indication that the shares may fall further in value to £7000 and lower. What would you do? Buy more? Sell? Hold? The choice would be yours, but understanding rationally why you made the choice is a crucial step in understanding what kind of investor you are likely to be as determined by your investing behaviour.

Learn as much as you can about risk and be honest with yourself about what you are really prepared to lose in the pursuit of what you reasonably expect to gain.

Finally remember that investing in the stock market is a constant learning process. See both your success and failure as part of the same process, and don’t pay too much attention to either.

Jamie E Smith is the author of Making Money From Stocks And Shares

This content was provided by one of our users, Jamie