Psychology and the stock market

Dr. Stanley Teitelbaum is a clinical psychologist and psychoanalyst who, for more than 35 years, has helped clients examine and overcome their emotional problems and interpersonal conflicts. He's appeared on Good Morning America, Nightline, 20/20 and Court TV and was a regular guest blogger on The Huffington Post. His latest book is "Smart Money: A Psychologist's Guide to Overcoming Self-defeating Patterns in Stock Market Investing".

Here's a link to the original blog post and episode.

What is your risk tolerance?

"When you ask people, what is your risk tolerance? How much do you feel you can tolerate losses? Because people usually go forward in their stock market investing with an expectation that this is going to be a joy ride that it's going to go forward and continue to go forward. And when you ask people, what is your risk tolerance? How much do you feel you can lose? Generally speaking, there are studies that have shown people, tend to exaggerate the level of risk tolerance that the reality is that they are not in a position to lose as much as they're saying that they might be able to risk. So that has to be reined in, in some way.

Cut your losses

"And it's especially true for new investors who need to really have an honest appraisal with themselves as to how much they can invest, how much they could afford to invest. And the first and perhaps one of the most important rules in stock market investing is the rule of cut your losses. In real estate it's location, location, location. In stock investing, it's cut your losses, cut your losses, cut your losses, which means instead of focusing extensively on how much you're going to win."

Emotional roadblocks

"We all have roadblocks that emanate from our personality issues, which can interfere with successful investing in the stock market. Buying high and selling low, the herding instinct, and searching for the next guru are among the prime examples of this phenomenon. Too many of us have internalized negative attitudes about ourselves as inadequate when it comes to managing our investments. Demystifying and overcoming these personal obstacles, along with acquiring and implementing several well-tested strategies can facilitate a greater degree of success. The goal is to transform our self-defeating investing patterns into more productive approaches. Knowledge is power, and by gaining greater recognition into their principles, investors can expect to generate more positive results."

The four most common self-defeating patterns

“The four most common self-defeating patterns are: 1 buying high and selling low, 2 the herd effect, which means following the herd and following up what you think or see everybody else is doing and then going along with that and related to that. And related to that is what we call FOMO, the fear of missing out: if everyone else is buying something and it seems to be going up, then what a jerk I would be if I didn't do that also. So, I'm afraid, I have fear of missing out, I don't want to leave the party, I want to join the party. So that's FOMO. And the 3rd self-defeating pattern is looking for the guru and not recognizing the fallibility of many gurus. And the 4th self-defeating prominent factor is staying too long with an underperforming financial advisor.”

And finally

"The emotions that often seem to influence or enter into the picture and influence the choices and decisions that investors make, or greed, fear, euphoria, despair, overconfidence, and regret."

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