Investment Psychology

The Contrian Cioban

The contrarian ‘Cioban’(Romanian for Shephard). We bring to an end a very interesting aspect on contrary opinion today. Next week we will discuss on how to invest on the basis of contrary opinion. To sum up some previous write ups, we discussed how market inflates and make bubbles and some historical bubbles. We tried relating these investment psychology aspects with the Romanian market. And as we delve week over week in the investment psychology, which drives market, the more convinced we get that what drives markets globally drives prices locally.

Pride goes before a loss

Pride Goes Before a Loss. “Pride of opinion has been responsible for the downfall of more men on Wall Street than any other factor”. These were the words of Charles Dow, the man who gave the word its first Index and the man who founded ‘The Wall Street Journal’. Building on Objective and Independent thinking, the sentiment theorist also understand the need to be humble. He is clear about the fact that markets are supreme and he should try to not have an ego equation with the market. It’s a recipe for disaster.

Independent Thinking

Independent Thinking. Despite the difficulty to be Objective, which is easier said than done, one should try to be as much impartial as possible. For the most part, exogenous factors have an unhealthy effect on our emotions, distracting us from clear and independent thinking. As such they represent a major obstacle to achieving our investment goals. The obvious solution would be to move to an isolated part of the world, turn off all communications and never read a newspaper. In this way we would never have our views distorted by events and outside opinions. But then it’s not a very practical solution.

How to be objective

How to be Objective. After the “Holy Grail” that we discussed last time highlighting that there’s no perfect tool and no formula that can make you quick rich, today we talk about another aspect of investment psychology. It deals with one’s own self. There are no certainties in the investment world, and where there are no certainties, one should begin with his own self. Since emotional commitment accompanies actual investment biases and prejudices are bound to creep in. A successful investor realizes this and tries to maintain psychological balance through self control. A self control that helps him/her keep a mental balance and avoid most of the noise from news, gossip and sharp changes in price that can set nerves quivering and emotion shivering between the two extremes of fear and greed.

There is no holy grail

There is no Holy Grail. Picking up the thread from where we left last time, the sentiment theorist is a kind of contrarian and someone who understands investment psychology. And the first step in investment psychology is knowing yourself. One who understands himself understands the dynamics ofmass psychology. As its mass psychology thatmakes markets.

The sentiment theorist

The Sentiment Theorist. We had have many theories till now covering every aspect of our life and about every detail. Theories which we read at school, and theories we had to cram for exams, theories on management and then theories on market. Every one of us has a theory, an explanation, of how we think something works or should work. Well! many of these theories are true and profound, the scientific theories specially. It’ s the theories of market which I will try refuting in these weekly columns using an odd sounding sentiment theory.

Patience is a profitable virtue

Patience is a Profitable Virtue. Last time we talked about the Pride and how it leads the loss a player incurs in the market. Today we discuss “Patience” and its related virtues. This is the penultimate part of mastering yourself before you take on the market.

Bubbles come and go and come again

Bubbles come and go and come again. There is something fascinating about human psychology. It is cyclical. Bank failures and manias mark the history of markets on a cyclical basis. What ever the regulators may do to control frauds, they invariably happen with a cyclical accuracy. The reason being that human behavior is patterned and mass psychology moves from confidence to optimism to greed to fear to panic and then back again. Today we continue the part with the contrarian approach and discuss some historical cases of market bubbles.

How does the bubble inflate?

After discussing about the reasons and techniques to master yourself today we start another aspect of investment psychology. This part as Martin Pring would define belongs to the learning’s from the street, the Wall Street in USA, the Dalal Street in Bombay or the Strada Carol I Boulevard BVB as Romanian traders would like to put it.

Staying the course

It really does not matter whether you are a trader or investor. The problems are the same. Only time horizons differ. Sticking to a plan is tough, as people, developments and psychological hurdles ar ready to trip us at the first opportunity. Though important to stay course, its also important to be flexible. Being flexible makes sense if bases of change lie in underlying economic conditions and not a comment by a broker, news or some unexpected news event. In the latter case, the change is internal not external.


The smart investor is mostly a contrarian and someone who understands investment psychology. And the first step in investment psychology is knowing yourself. One who understands himself understands the dynamics of mass psychology. As its mass psychology that makes markets.

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