"Stock Market Psychology Beats Most Investors. Gain Control of Your Emotions, Invest Like Warren Buffett - Never Get Into Bad Trades"


  • Stock Market Psychology is a little-known topic - for success, you must understand why some people win and some people lose

  • Your discipline is key to your success - keep it under control

  • Decide what type of investor you want to be, according to your personality (but for Retirement Investing, there are really only two types)

  • Avoid the emotional roller-coaster that trading can cause by setting your own rules.  And sticking to them

  • Don't be greedy, or fearful.  Use these indicators and you'll not have those problems

Warren Buffett says:

"With each investment you make, you should have the courage
and the conviction to place at least 10% of your net worth in that stock"

"Overcome Emotional Stock Market Trading"

Stock Market Psychology plagues us all. We're not beaten by the Markets.  We beat ourselves.

As homo sapiens we are all wired to be emotional.  We are fairly emotional people.  As are most people we know.

But allowing your emotions to get the better of you in the Markets is not a good idea.  No good at all.

We'll be honest with you.  Control of your emotions can be learned but you'll never make a perfect trader - nobody will.

The best you can hope for, as explained elsewhere on this website, is to make for yourself a set of rules.

Trade mechanically and stick to your rules.  You'll be right more often than you're wrong.

Retirement Investing though, if done as suggested on this website, should eliminate 95% of any emotion.

First realise, and decide, what type of investor you really need to be.

"What Type of Investor Are You?"

We are all wired differently.  But most humans are emotional.  And when it comes to investing we reckon that means just about 99% of us.


Because nobody likes to lose money.  And everybody gets greedy - given the opportunity.

So before you start investing in the stock market, take a good, hard look at yourself and decide if it really is for you.  Private investors roughly fall into categories.  Some of us maybe fit into more than one category. 

Take a look at the types of investor listed below and try to pigeon-hole yourself.  And be honest, if stock market investing is not for you, then give your money to someone else to invest.  But the whole idea of DIY investing is to outperform, so it's in your interest to think about this.

To be a successful long term investor you may need to re-adjust your current thinking a little bit, and become the investor you need to be.  A long time ago, we used to be risk takers.  We used to trade frequently - as frequently as several times in a day.

When we began investing seriously for our Pensions we tried doing the same thing , but soon realised that it was not the way to go.

In short, don't over-trade.

Here are the categories for you to choose from (there are 11 of them):

Investor Type #1.  Value Investor

This is listed as No. 1 for a very good reason.  Our whole website is centred around the principle of Value Investing

It's what Warren Buffett does.  It's what we now do (well,  about 70% of our trading is).

Put simply, 'Value Investing' is finding a share that is undervalued by the market. 

That is, the market price is lower than what you think it should be, and therefore the market will sooner or later re-rate the share to its true value.

But we like to call these type of share "quality" shares.  Not all quality shares are undervalued. You have to be patient and wait until they are.  At some point in the investment cycle, all quality shares will become undervalued. 

For successful Retirement Investing, you should be a 'Value Investor'.

Investor Type #2.  Growth Investor

We have placed Growth Investing as the No. 2 method.  We've done this so that it is consistent with the way Warren Buffett invests.  (he invests roughly 85% 'Value investing' and 15% 'Growth Investing').

But it is only marginally our Number 2.  We tend to be keen 'Momentum Investors' (see below) - as well as 'Growth Investors'.  

'Growth Investing' is basically looking for companies that are relatively new and in the early stage of their development.  A lot of high technology companies fall into this category.

One of the main reasons 'Growth Investing' isn't our No.1 choice is that there are so many new companies coming on to the market, how do you know which ones will be winners?  It's hard to do any kind of analysis without at least 5 years of market trading.

Out of every 100 new companies, there might be just a few that 'make it.'  But which ones?

Furthermore, we only want to invest in relatively high market value companies.  We rarely invest in companies with a market capitalisation of less then £200m.  We tend to favour companies with a market capitalisation greater than £1 billion.

Investor Type #3.  Momentum Investor

Momentum Investing is really our second choice of type of share investment.  We do like to mimic Warren Buffett, but find ourselves veering away from his philosophy on this, but only in our allocation of type of share. 

We reckon our investment mix is something like:  

  • 70% 'Value Investing' / 10% 'Momentum Investing' / 20% 'Growth Investing'.

'Momentum Investing' is buying shares that are already rising and selling shares that are falling.  It falls in with our simple strategy of only buying in rising markets i.e. Bull Markets.

And, we like to be out of shares completely in a Bear Market.  (Easier said than done).

Investor Type #4.  Forever Investor

There is a lot to be said for buying a quality share and holding it forever.

However, this strategy can be flawed.

Because there will ALWAYS be a downtrend in the market, and when this happens you need to be out of the market.

We use a simple indicator to inform us when to do this, and we use the same indicator to tell us when to get back in.

Investor Type #5.  Contrarian Investor

To beat the markets you need a different mindset.  You need to ignore all the noise and news.  For the most part, do not follow the majority, they are wrong most of the time.  You need to think outside the box.  Warren Buffett is a master at Contrarian Investing. Read some of his wisdom.

Investor Type #6.  Frequent Trader

Buying shares and selling them only a short time after is a great strategy.  But of course, it ain't that easy.  And, of course, you need to be careful you do not over-trade.

To be successful at that game you'd need to spend a lot of time studying the market.

If you really want to be a frequent trader you would also need to select a trading platform that doesn't over-charge on trades.  But the biggest dampener to frequent trading is stamp duty charges when you buy - at 0.5% per trade.  Ouch!

Over-trading can wipe out a lot of your profits.  Be careful if you go down this route.

Investor Type #7.  Fund Investor

For those that haven't got the time or the inclination to do their own due diligence with ordinary shares then being a 'Fund Investor' could be the way to go.

Study the section on Sector Rotation and decide what sectors you want to be invested in at any one time.  Then you can either invest in investment trusts, unit trusts (or mutual funds if you're in the US) but our choice would be Exchange Traded Products (ETPs)

Investor Type #8. Income Investor

People who want to draw an income from their pension whilst their capital stays in tact is a common desire among retirees.

A lot of investment advisors recommend this kind of strategy - but we reckon it's dangerous.

Our view is that a much better strategy would be, if you want income, is to stay invested in quality shares and as they appreciate in value, sell a few of them to create the desired income amount.

We don't think there's much logic in holding shares just for their dividends, especially if the underlying share is not performing.

Investor Type #9.  Passive Investor

The secret to being a successful Passive Investor is in finding the right vehicle to track.  And then investing in a tracker fund that follows that vehicle.

Investor Type #10.  Day Trader

By definition, 'Day Trading' is the buying and selling of shares in the same day.

A high risk strategy indeed.  And best left to the pros.

Lots of people have taken up 'Day Trading' in the last 20 years or so, some are very successful and are still trading, some ride their luck, and others don't last very long.

'Day Trading' is most definitely NOT suitable for Retirement Investing.

Investor Type #11.  Advised Investor

Some very reputable companies offer to "manage" your Pension Fund, but the whole idea of this website is to take the opposite view, and Do It Yourself.

However, the advisory way is a route for those that feel they really don't have the time, the inclination, the knowledge, or the confidence to do it themselves. 

All we're trying to do via this website is to say to these people: "read what's on this website and then make an informed decision."  

The advantages are of course, that you can easily out-perform managed funds if you Do It Yourself.. 

Besides ... we don't rate Investment Advisors.  we've come across too many horror stories to have any confidence at all.

Investor Type #12.  Ethical Investor

This is bottom of our list for a reason.

We would not invest in a company just because our principles were against the type of products that they produce. 

But some people are extremely principled, and of course, that's their choice.  There are ethical funds to invest in if you want to follow this route.  But you can do a heck of a lot better by choosing individual shares.

So ...

Those are the twelve types of investor that we can think of. 

We've listed the above in the order that we would consider them suitable for DIY Pension Investors, with the most suitable from No.1 down to the least suitable, No.12

Read on and decide if DIY Investing is for you.  But do bear in mind, that to be a successful DIY Investor you only need to trade 1, 2 and 3 above.  And, if you stick with that, you will avoid 95% of the roller-coaster emotions that more active investors succumb to.

Whatever type of investor you aspire to be, you will not succeed without a concrete understanding of Stock Market Psychology.  For further reading go to: Contrarian Investing.

"The Cycle of Stock Market Emotions"

But let's get back to the topic of why most people fail.

The study of 'Stock Market Psychology' is a relatively new topic.

It's only really been taken seriously since about the 1950's.  It was around this time that it was recognised that to avoid the pitfalls that most amateurs succumb to, investors had to control their emotions. 

Note the word "control."  Because you will never completely conquer your fears, but you can control them by making rational, sensible decisions.

If you've already read about the business cycle, then an emotions cycle can also be drawn to match each various stage of that business cycle.  See image below:

Figure 1

Stock Market Psychology

The above graphic is fairly self-intuitive.  It reminds us of one of Warren Buffett's quotes: "Be fearful when people are greedy, and be greedy when people are fearful."

We'll never forget what a wise old man once said.  He said: "The Stock Market is always right.  Not just some of the time.  Not just part of the time.  But ALL the time."

Wow!  What wise words they were. 

And it's hard to find any moment when that statement is not true.

We would however, amend the above statements, albeit slightly.  We would say: "The Stock Market's perception of price is always right."  The price quoted is the price at which you can buy and sell. Period.  But it doesn't mean that it is a "fair" price.

It doesn't matter what you think, if the market is moving opposite to the way you want it to, then you are losing money. 

You will never get it right all the time.

Conventional wisdom says that making money from the Stock Market is simple. 

Buy when shares are cheap.  Sell when they are expensive. 

That is, buy low, sell high.

But most people do the opposite.  Buy high and sell low. See examples further down this article and the diagram just above.

The reason is to do with the left side of our brains.  Our brains are good at working out the cause and effect of things but can't cope with Stock Market ups and downs.

Humans put too much emphasis on what has just happened (recency) and expect the same things to keep on happening.

So when shares go up, they expect them to keep going up.  But when shares go down, they sell them for fear of losing even more money. (And this would explain why market falls are always faster than market rises).

The moral of all this?  Don't be afraid to buy and hold for the long term.  (This doesn't mean hold for eternity.  But hold as long as the fundamentals are still in tact).

Here's another example:  An investor bought shares in 2007 and quickly ramped up profits of 70-80%.  Others, having seen his success, piled in after him.  But then came the fall in 2008 giving them a 50% loss.  What did they all do?  They sold!

Then what?  The market started to pick up in 2009.

It's all about discipline.  One of the biggest mistakes amateurs make, is to trade too often.  

Best way around this is to spend a little more time deciding what to buy in the first place, then you would have the confidence to hold your purchase because you know it is the result of sound research.

"Books About Stock Market Psychology"

Below are a few books on 'Stock Market Psychology' that are well worth the read.  We found each one fascinating but for different reasons. 

Like we have said ad nauseum on the website, you really shouldn't be investing in stocks until you have studied all aspects of Stock Market Investing. 

Even Warren Buffett says that you should learn from other peoples' mistakes.  Making mistakes in the Stock Market is a very expensive way to learn.

Some call it tuition fees.

We call it stupidity tax.

A few pounds spent on the right reading material is money well spent.  Ask anyone who has had their fingers badly burned!

The Trading Athlete

The Trading Athlete by Shane Murphy

The authors of this book have hit on a unique analogy.

Top athletes find themselves under constant pressure and the strategies of sports psychology have been applied to the field of trading.

Their idea is to apply the strategies that top sports people have been using to overcome stress and lack of confidence by setting goals and staying focused. 

The techniques used help you overcome bad days, bad weeks, or even bad months because they have been proven to work.

This book is right up there with the best in market psychology.

Get your copy right here:

The Trading Athlete: Winning the Mental Game of Online Trading (Wiley Trading)
Financial Risk Taking

Financial Risk Taking by Mike Elvin

Mike Elvin explores the relatioship between human behaviour and the financial markets.   

In 8 chapters the writer covers such topics as emotions, self-sabotage behaviours, loss and success depressions, and stress.

The final chapter is particularly interesing, where 8 standards divided into 5 sections that require the reader to consider his (75) actions.

A book on market psychology that is so different to what you might expect.

A refreshing change.

Order your copy here:

Financial Risk Taking: An Introduction to the Psychology of Trading and Behavioural Finance
Why You Win Or Lose

Why You Win Or Lose by Fred Kelly

Fred Kelly was an amateur psychologist that made importat observatios about the average human's behavior when buying and selling stocks.

Kelly has recognized that the general public, that is the average investor, has taken up trading in stocks as a pastime.  Despite major setbacks, like the Great Crash of 1929,  a World War like no other, and other crises, the ordinary man comes back for more.

Gambling that is.  It is now a national game. People like the "Thrill of the Kill"

Stock Trading has taken over the thrill of poker and crap. It's easy to call up your broker and buy a few hundred of XYZ Corporation. 

This book should be read by everyone, not just as a route to making money ut more a route to saving money.  It is well-written in a simple and direct style.

Order now Fred Kelly's book by clicking the link below:

Why You Win or Lose by Fred Kelly (1962-06-01)
The Disciplined Trader

The Disciplined Trader by Mark Douglas

Mark Douglas has been trading his own account since 1960 and was the Chief Executive for CompuTrac a Technical Analysis company.

His conclusions were that successful trading is 80% psychological and 20% methodological. Emotion is the enemy of successful trades. That's why, even with a modest knowledge of fundamental and technical information, the trader who is in psychological control will be the winner in the trading environment.

Grace your bookshelf with this superb classic:

The Disciplined Trader: Developing Winning Attitudes


Expect 'Stock Market Psychology' to play a large part in your success, or failure.

However, to be successful with your Retirement Investing you need to be more conservative.

Sometimes, nay, most times, you have to go against the herd.  Don't listen to tipsters.  Don't give tips.  Do your own research.

It's a long term thing.  You have to be patient.

Decide to be a conservative investor and sleep well at night.  Warren Buffett has shown that the best way to succeed, the best way to grow your 'Pension Pot', and the best way to control your emotions, is by finding companies that are also in it for the long haul.

These type of companies will have already been around for a long time and will be around for a long time to come. 

Make these the kind of companies you invest in, and 'Stock Market Psychology' will only interfere with you in a very minor way.  And ...

You'll sleep soundly at night.

Final words: 

Until you really understand 'Stock Market Psychology' do not dip your toes into the marketplace.  If you do "play" the market before you have got to grips with Stock Market Psychology, be prepared to pay an awful lot of stupidity tax.

You have been warned!

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