How to Conquer Our Bad Investing Behaviours

How do you react when you are having difficulty understanding the markets?

What about when you experience a loss of or can’t seem to make a profit?

Let’s face it, we are all not going to become master investors and these scenarios would make most of us upset, but we really only have two choices. We can give up or we can muster up all of our energy and work towards becoming the best investor we can possibly be.

There are a couple of obstacles that must be conquered before we can truly become masters. The first one is our biology and the other is overcoming our learned behaviours from the past. In most instances, these factors are protective. They keep us from putting ourselves in harms way. When investing, however, giving in to our instincts or acting according to what we have experienced in the past can be detrimental to our success.

Let’s look at an example of how this works in terms of taking losses. If we accidentally touch a hot stove, we immediately pull our hand away to avoid causing any further injury to ourselves. This is both a biological reaction and if we have ever been burned by a stove before, a learned  response based upon fear.  Now, if we look at this from the perspective of investing, we cannot instinctively pull away or accept defeat because we are afraid. We must teach ourselves to remain calm, even when perceiving danger.

Most of us have learned not to take risks with money. As investors, we may know at least intellectually, that in order to be successful, we must take some risks, keep our emotions and impulses in check and make rational decisions. Of course, while we may know something, it isn’t always easy to actually do it. Because we are all human, we will feel elated when we make a great trade, upset when we lose money and quickly close out trades when we think the market may be changing course.

Depending upon our previous experiences, personality and disposition we may look for others to console us when we lose or, if we have been successful, we may have diligently followed others leads and stuck to socially accepted norms.

On the other hand, master traders are their own species and behave differently than most other people. They tend to look inward rather than following the lead of others. They do not fear taking risks despite the potential for negative outcomes. If we examine the histories of some of the most famous investors, they have gone through great highs and lows throughout their lives. They experienced things that would bring most of us to our knees, but they are the ones who dusted themselves off, got up and moved on to their next opportunity.

Just like the famous investors, we all have our own histories. We are individuals with our own strengths and weaknesses and it isn’t possible to completely change who we are and be something we are not. That’s ok. We should embrace who we are, even if it results in us not becoming a master trader in the near future. We can, however, invest our energy and time to conquer our genetic predispositions and our past experiences that guide us in our decision making process.

I won’t lie; It is not an easy task. However, it is absolutely possible to do if we take it one step at a time and persevere. If I am the type of person that fears taking risks and dealing with losses, perhaps I can take risks, but start off small. Instead of risking 25% of my money on one trade (a bad idea by the way), I might risk 3%. Without everything being at stake, I can then begin to get used to the fact that there will be losses, but it is expected when trading and that I will eventually bounce back.

We all experience some degree of disappointment when we lose money. After all, we are conditioned to feel emotional pain when we have a loss and it is extremely difficult to get past our innate and learned reactions.

There is a reason our biology and learned behaviours exist. In most scenarios, other than in the markets, they are adaptive and keep us out of danger. That is why it is so hard to override them. Yet, the more we practice doing it and start accepting that loss is inevitable in trading and in life, it will become easier and easier over time.

I like to imagine that I am playing a role in a film and that I am looking at myself and my loss as an objective outsider to help me cope with loss. It may be helpful to imagine that the money is play money thereby lessening the sting. The more we do whatever it is that works for us, the quicker we will begin to accept the realities of loss. It isn’t realistic to think that it will happen overnight, but if we remain committed to practising, our perseverance will have some very positive effects on our ability to succeed.