How to Be a Better Investor by Understanding Your Own Psychology
By Evgeny Kireev
My journey as an investor has taught me that the art of investing extends beyond financial acumen, number-crunching, and the cold analysis of market trends—it’s deeply intertwined with one’s personal and professional experiences. Life’s lessons, both triumphs and setbacks, inevitably help to shape our perceptions, risk appetite, and ultimately, our investment decisions. Understanding this will help you become a better investor.
The psychology of investing
Stanford University research has shown that an investor’s past economic experiences significantly influence their risk tolerance and market participation. Investors with positive stock market experiences tend to be less risk-averse, while individuals who have witnessed high inflation often shy away from bonds in favor of more liquid assets. More recent economic experiences tend to have a greater impact on investor behavior.
It's not just professional experience, but events in our personal lives, which impact our strategy as an investor. Mistakes, especially, are invaluable in the learning curve of any business professional, providing a road map of what to avoid and what to embrace. However, there is a caveat, as this can also lead to distortions in judgment, making an investor overly cautious or risk averse.
Even one’s earliest interactions with finance can affect how we approach investments. For instance, growing up in a financially prudent household may shape an investor’s approach to risk management, teaching the value of cautious yet strategic investment moves. Seeing one’s parents navigate financial challenges with resilience may provide perspective and instill confidence.
Reflecting on my personal journey, I can see how the investment habits and attitudes I absorbed from my family and early life experiences have influenced my approach to finance. Early lessons become ingrained and can be a guiding light in times of market volatility and uncertainty.
An engineering background's effect on investing
My own approach to investing has been significantly influenced by my background as an engineer. At its core, engineering is about problem-solving, efficiency, and precision. It involves attention to detail, numeracy, risk management, and meticulous calculation in the pursuit of tangible results—principles directly transferable to the world of investing.
In finance, just as in engineering, every decision carries its own set of risks and potential rewards, necessitating careful consideration and thorough analysis. In my investment decisions, I draw on my engineering principles, applying the same level of rigor and thoroughness to evaluate investment opportunities as I would to solving complex engineering problems.
Given this background, I am naturally inclined towards technical analysis in my investment decisions. In engineering projects, statistical models are often used to predict outcomes and optimize processes; similarly, in investing, technical analysis is used to spot potential market movements and inform decision-making. This approach is particularly effective for identifying short-term trading signals. It is akin to constructing a bridge where every stress point is identified and tested; in investing, every market signal is carefully analyzed before taking a step.
Technical analysis is not just about individual stocks, it's a tool for evaluating broader market and sector trends. It allows us to identify and decipher patterns using statistical analysis and principles of behavioral economics—drawing logical conclusions from data sets, just like engineering.
A methodical approach, focusing on data, patterns, and potential outcomes, is particularly relevant today where a careful assessment of risks and returns is crucial. By integrating an engineering mindset into my investment strategy, I aim to make more informed, precise decisions, striking a balance between innovation and cost-effectiveness—much like an engineer would approach a challenging project.
How culture and values impact investment choices
Investment choices are not just informed by our professional careers but are often a reflection of our deeper personal values and cultural backgrounds. For instance, values like sustainability and corporate responsibility are increasingly shaping investment decisions—a trend evident in the growing popularity of socially responsible investment funds and green bonds, which cater to investors looking to make a positive impact while earning returns.
Values-driven investing reflects a desire to align financial goals with personal ethics, leading to a more conscious investment approach. My own portfolio, for instance, reflects a wide range of interests but there is a common thread of innovative technologies with a firm focus on social and environmental responsibility.
Cultural background also plays a pivotal role in shaping investment strategies. Different cultures have varied attitudes towards saving, risk-taking, and financial planning, all of which significantly influence investment behavior. For example, in some cultures, there is a strong emphasis on saving and risk aversion, leading to a preference for conservative investment vehicles like government bonds or savings accounts. In contrast, other cultures might prioritize wealth accumulation and be more open to higher-risk, higher-reward investments.
Recognizing cultural and values-driven influences can lead to more fulfilling and aligned investment experiences—but it is equally important to acknowledge where they may present blind spots.
Become a better investor by understanding your biases
Investing is not just about deploying capital; it's about deploying one’s experiences, knowledge, instincts, and unique skill set—together, they are our greatest assets. Personal experiences, especially the missteps, are a goldmine of learning for any investor. My own investment mishaps have been pivotal in refining my strategy and decision-making process. They serve as reminders of what to avoid and what strategies to pursue.
However, these experiences can sometimes lead to an excess of caution (or confidence), making one too risk-averse, for instance, which could mean missing out on potential opportunities. The key to effective investing is therefore not only leveraging the strengths gained from our experience, but also acknowledging and mitigating the inherent biases and weaknesses they may introduce—in other words, understanding oneself is just as crucial as understanding the market.
Investing is much more than a financial venture; it's a personal journey. It's about leveraging our experiences, understanding our comfort zones, and also knowing when to push beyond them to seize opportunities. It's about marrying the intuitive with the analytical, the personal with the professional. This holistic approach, blending self-awareness with financial acumen, is what I believe makes for truly successful investing.
FAQs on how to be a successful investor
What does it take to be a good investor?
Three words: research, research, research. It’s so important to be prepared to put in the work to truly understand the balance between risk and a sure thing. There’s always going to be risk involved, but as a good investor, you evaluate that risk and see if it’s worth the leap.
What drives people to invest?
Aside from potential financial incentives, people should invest because they have a passion for change. Being a part of creating innovative solutions that fill gaps in the market is hugely exciting.
What influences investor behavior?
A number of things can affect investor behavior: everything from industry news and potential competition to geopolitical situations that affect macroeconomics. Personal experiences with what has worked and what hasn’t, as well as personality traits including appetite for risk, all affect how investors behave.
About the Author
Post by: Evgeny Kireev
Evgeny Kireev is an investor, entrepreneur, and motorsport enthusiast.
Website: www.ekireevblog.com
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