Most people are not natural born investors, because your instincts work against you. 

Your instincts guide you to buy when the market is going up (buy high) and sell when the market is going down (sell low).

Buying high and selling low is a sure way to lose money.

Here’s how to flip your thinking and make you a better investor.

Think like an owner

Most people think of stocks as things that go up and down in the stock market. But the truth is that if you own a stock, you own a tiny bit of a company. It is your company.

The reason why you should think like this is because when you do, it changes your mindset around investing. Owners of private businesses don’t have a stock market to look at daily and because they cannot see prices going up and down, they never get tempted to do something foolish (like sell when the stock is down).

From experience, I can confirm that private businesses hardly ever sell at a discount. It doesn’t matter how badly the market is doing, if you approach the owner of a private business, they will not sell it cheaply. In other words, they are never tempted into doing something foolhardy because they consider themselves the owners of the business.

Warren Buffett shared this sentiment in his 2022 letter.

If you own stocks, think like an owner. Worry about the business, not the price. Make calculated decisions and never consider your stock as a piece of paper or merely a price on a chart. If you think like an owner, you will make better buy and sell decisions. 

Don’t look at the market until necessary

Ever felt like buying into a stock when it is rising rapidly?

There’s an acronym for it – FOMO - Fear Of Missing Out. You feel like buying because you don’t want to miss out.

Buying when its going up feels right, but what’s happening is your natural instincts are working against you. Your instinct will tell you to buy while it is going up and to sell while it is going down.

You might think you can use willpower and do the opposite, but it is really hard to do so.

Here’s the S&P500 from January 2022 until October 2022:

In 2022, U.S. inflation was the highest in a generation and the economy was cooling. By October 2022, the market had fallen a total of 25.6% in 10 months. At that moment, you wouldn’t know how much further it could fall or for how much longer it could fall. And that is usually enough to deter you from investing.

Yet is was the best time to invest. Look at what happened in the next 18 months – the market went up 47%.

The problem is that you cannot predict market lows or highs. Most people would have sold on the way down and then waited a long time before buying back in, most likely buying in at a higher price than they sold out.

Price action stirs up emotions in you. And those emotions trigger unsound investment decisions.

For that reason, if you own stocks (or funds). Don’t look at the price too often. Check it once or twice a year.

At ROA, we practice what we preach. If you ask how much we paid for a stock, I couldn’t tell you. I would have to look it up. Once we purchase a stock, the price becomes superfluous information. The only time you need to know the purchase price is after selling, when you have to work out your capital gains tax.

You don’t even need to know the purchase price at the point you sell – because that is irrelevant to your selling decision. Some people will disagree and want to know the purchase price so they can ensure that they sell it for at least that amount. That is a cognitive error called Anchoring – and it will mess with your head. Usually it makes you hang onto losers while waiting (i.e. hoping) that they return to your purchase price.

The solution: don’t look at stock prices if you don’t have to. Delete the stocks from your mobile app. If you are a long-term investor, there is nothing to be gained from knowing prices, unless you’re buying.

Conclusion

Two simple psychological tricks to improve your investment results:

1. Think of the stock as a business.

2. Don’t check stock prices all the time.

Give these a try for a while and you will see the difference.

I would like to hear what you’re up to.

DM me on social media or email me.