Investing is both an exercise in finance and an exercise in psychology.
Doing good fundamental research is a must, but an investor’s ability to control emotional behavior and mindset is also critical to success.
Even the best investors in the world succumb to their own emotional vices.
What they don’t tell you is that they are also very good at minimizing their emotional vices.
On the other hand, mastering the psychology of investing and taming your emotions is an extremely difficult skill that can only be perfected on the investing battlefield.
This week, Morgan Housel, author of the best-selling book, The Psychology of Money, joined the Bankless podcast to share 10 lessons on how to think about money and wealth to improve investment thinking and avoid behavior-driven mistakes.
There is no free lunch in the world. Anything worth pursuing has a price.
In crypto, the price of chasing excess returns is being forced to endure huge volatility.
Cryptocurrencies may be the only asset class where investors can reap life-changing risk-scale returns on the open market in a matter of months.
Despite this enticing benefit, investing in cryptocurrencies is easier said than done due to the huge price volatility of most coins. In order to profit from these higher highs, investors may also have to put up with lower lows, and must have the courage to withstand volatility and manage the consequences of watching their portfolio evaporate in the blink of an eye. pain, anxiety, sadness, depression and disappointment.
In the long run, cryptocurrency investors who weather the volatility tend to be rewarded over time.
For example, ETH has had 8 drops of more than 50% in its 7-year history (on average 1 per year). Investors looking for quick profits have long been eliminated.
Those who study the fundamentals seriously and have the courage are still reap the benefits today.
no one is crazy
Our personal experiences shape how we view the world. This is true both in personal life and in the way you manage your money and invest.
Our unique personal finance experiences influence how we spend, manage and invest.
Because of this, there is no clear “right” or “wrong” way to invest. Everyone should manage their portfolio according to their risk tolerance, time horizon and financial goals.
One example discussed in the podcast is meme coins. OGs may scoff at the idea of newbies choosing to buy assets that seem to have no fundamental value. But people who are new to cryptocurrencies or are occasionally interested may see these assets as speculative vehicles that can help them achieve their financial goals.
These different investor preferences and groups of market participants (another example are short-term traders and long-term investors) can form a lot of discussion.
Because of this, we should be less judgmental when we think about other people’s decisions, because everyone in the market is playing their own personalization game.
Luck vs. Risk
Luck and risk are two sides of the same coin.
Luck and risk are both long-tail event factors, or unforeseen events that are beyond the control of the individual investor and have a huge impact on returns.
Smart investors are very focused on reducing risk and will diversify and/or hedge their portfolios to this end.
However, luck can also have an equally large impact on returns. The most successful people in the world are very lucky to be in the right place at the right time. For example, Bill Gates believes that if he hadn’t studied computing in high school, he wouldn’t have started Microsoft.
These random lucks tend to distort investors’ perceptions, making them more prone to survivorship bias, leading them to try to replicate those truly unrepeatable successes.
To mitigate the situation, Morgan advises investors to try to model people or qualities they can actually emulate.
Greed is a terrible drug.
Craving more is not necessarily a bad thing if kept in moderation, as it motivates people to work harder and improve their quality of life. But greed is the ugly undertone of unrealistic expectations, and it leads to reckless risk-taking, which is extremely dangerous.
This is especially true in the crypto space, where crypto markets are traded 24/7, FOMO is rampant, and social media is used as a scoreboard.
In a bull market, for example, many market participants blame themselves for not earning as much as they think their peers are earning. In 2021, we often hear crypto investors complaining that their positions are “only” 5x, not 10 or 20x, but 5x is already an excellent return by any metric.
The fallacy of not earning enough will spiral, leading to reckless and destructive risk-taking. As Morgan points out, the profits made by hedge fund 3AC co-founders Su Zhu and Kyle Davies during the 2020-2021 bull market would have allowed them to live like kings.
Instead, their desire to ask for more ended up destroying the company, causing them to use more leverage in increasingly risky bets.
The key here is not to compare your gains to those lucky guys on the golf course who boast about their instant riches, but to the standards and goals you set for yourself.
To ensure your earnings are adequate, your expectations shouldn’t exceed your current income, Morgan advises.
money is a tool of freedom
As David likes to say, cryptocurrencies don’t make you rich, they make you free.
While this refers to sovereigns that come from self-custody and being truly unbanked, the phrase also extends to capital gains that can be derived from market investments.
The accumulation of assets and wealth is what philosophers call positive freedom. It expands the freedom of life by giving people more control over their time. Essentially, we’re closer to an end state where we can wake up in the morning and go through the day completely as we want.
Control over time is extremely rare. As Morgan notes when describing his dinner with a wealthy fund manager, there is a situation where “cash is plentiful, time is short,” or financially wealthy.
The power of compound interest
There is a saying in the investment world: “Compound interest is the eighth wonder of the world”.
While investors are vulnerable to short-term volatility in the market, they often forget that the truly great low-risk returns come from compounding over the long term.
Warren Buffett is a prime example. Buffett is known for his long-term investments. The Oracle of Omaha has amassed a fortune of $97.5 billion, about 96 percent of which came after his 59th birthday.
Of course, Buffett is also an investing genius who is good at making really good bets. But we can see that much of Buffett’s wealth can be simply attributed to investing enough time in the markets to earn huge compounded returns.
As the field of encryption continues to evolve in the coming decades, this principle can also be applied to the field of encryption.
gain wealth and keep wealth
Gaining wealth and maintaining wealth require diametrically opposed mindsets.
In Morgan’s view, to get rich, you have to be optimistic. This is because optimists are more willing to take personal and/or financial risks, do the opposite, and see the potential of an idea, business, or project that has the potential to deliver great returns.
However, in order to remain wealthy, one must be conservative. That doesn’t mean hiding money under a mattress. But when it comes to prioritizing protecting rather than growing your own capital, it’s wise to adopt a balanced, more risk-averse mindset and investment strategy.
Morgan has it right – you should save like a pessimist and invest like an optimist.
Wise vs. Reasonable
While we often strive to make sound decisions, sometimes it’s best to make smart decisions.
In other words, we should make the best decision for ourselves at any given point in time, even if in theory this decision seems meaningless and does not maximize short-term profits for investors.
An example of this is choosing between a one-time investment and dollar cost averaging (DCA). Choosing the former seems reasonable, but how likely are you to time the bottom?
For some investors, it may be wiser to opt for the latter in order to reduce the chance of regretting an immediate drop in price after investing.
Although this may result in lower short-term returns, making an informed decision to choose DCA and reduce the chance of regret can avoid influencing their judgment and making corresponding mistakes in the long-term.
people will change
Just as prices change over time, so do people and their living preferences.
Morgan believes that people underestimate how much they can change over a lifetime, and thus how much this will affect their financial goals.
For example, a recent college graduate and crypto bull might decide that, given his belief in the long-term upside potential of cryptocurrencies, and the potential for future income to cover losses over time, it would be a good idea to put an entire portfolio in this asset class. reasonable.
However, let’s assume the crypto bull gets married and has kids. When he was in his 20s, living in a mansion with a big pool and the latest cars was the only thing he wanted. Now in his 30s and having kids, he realizes he’s closer to life satisfaction than he ever wanted.
Due to changing circumstances, he may begin to prioritize financial stability over maximizing potential returns. He may choose to diversify beyond cryptocurrencies into less volatile assets such as real estate.
The best way to deal with change is to avoid extremes when planning your finances. Investors seeking to minimize the impact of change should aim to find a balance between risk-taking and conservatism.
People are often drawn to pessimism because it sounds intelligent, down-to-earth, and realistic. As Morgan notes, pessimists will sound like they’re trying to help you by pointing out shortcomings and warning about potential risks.
This pessimistic tendency is driven in part by the nature of good news and bad news. It’s easier to notice when bad things happen because they usually happen in the blink of an eye, while the benefits of good news take time to manifest.
Terra, for example, imploded in just a few days, destroying tens of billions. Crypto pessimists might point to this as one of the reasons why cryptocurrencies as a whole have failed.
In saying this, however, pessimists ignore the fact that, over the past 14 years, cryptocurrencies have still managed to create a sovereign, robust, and resilient trillion-dollar ecosystem that can withstand extreme events , like an 11-digit stablecoin crash without any government intervention.
Furthermore, optimists will point out that Terra is another in a series of seemingly existing crises that the cryptocurrency has managed to overcome in its short history.
Optimists will stress that despite the chaos, we are still standing.
We are still here, we are still building.
So, pessimists may sell. But staying optimistic is usually worth it in the long run.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/this-article-summarizes-10-investment-psychology-tips/
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