How You Can Win in Investing

To many investors, the quote above may sound ridiculous. How can rational investors agree that long-term investing is the best way to proceed, but yet go on to do something else?

Well, we can consider the world of investing to have two kinds of ‘rooms’.

One’s our investing study room, where we conduct all our investing-related thinking and learning. Its quiet and unobtrusive environment make it easy for us to to come to rational decisions with a clear head. With the benefits of long term investing, we can agree – while seated in the study room – that it is the way to go.

The other room – the investing execution room – is where the stock market is. And it is filled with flashing bright lights and cheering (or booing) crowds, not unlike a casino.

The transition from the quiet study room to the boisterous and chaotic execution room can be fraught with more difficulties than first imagined; in the transition process, rational investors may also become irrational.

But why is that?

Psychology plays a part

That’s because it is much easier to be rational with our investments within a non-threatening environment. When we do not have any money at stake, we may find ourselves with high convictions on our investing knowledge.

Executing upon our convictions though, is a different matter.

As humans, money has come to represent sustenance to life. Losing money is psychologically painful to endure for the common investor. Furthermore, in an environment of high stress (and the stock market can be stressful), we may be susceptible to emotions of greed and fear. All these emotions may contrive to push aside “our rational self” in decision making.

Dealing with psychology

Managing these psychological factors may be the key to helping us put our “rational side” in charge when it comes to executing our best investing ideas. Coming to terms with our own psychological fears is the first step.

So, if it is the fear of monetary loss that worries you, then maybe keeping some cash on hand at all times can soothe that fear. If it is the fear of share prices tanking, then consider taking smaller positions. Or if it is the noise from the financial media that unsettles you, then take a stroll in a park or do some gardening.

The bottom line is this: it is vital to make sure our rational investment-reasoning makes its way into our portfolios.

Foolish summary

When we invest, we may want to adopt different mindsets when moving from our investing study room to the investing execution room.

If we can be aware of the change which can occur from one room to the next, we can begin to put our best investing plans into action – and perhaps, even win the investing game in the process.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.