Psychological Tips for Successful Stock Investing

These psyc tips are from an investment book first published in the early 1960’s “Build a Fortune in the Stock Market” by David L. Markstein. I thought it would be fun to take a peek back and see if they are still applicable in the 21st century!

Don’t Rely On Your Memory.

When doing analysis – and tracking investments – don’t rely on your memory, even if you have a photographic one. Write down your figures or track them online and look them up to be sure.

Transposing even a single digit on one of the research factoids can throw off your decision making.

Although we have multitudes of new and better tools to track and analyze, I still find this to be true. If I don’t look it up every time, I never remember correctly. I even have to write down the asset allocation percentages I want and which of my stocks belong in which category.

Conventional Investment Wisdom Can Lead You Astray.

Even if you were taught to find a good stock and hold onto it, you should still review it’s stature and be ready and willing to dump it or buy more as the situation warrants.

This seems to be timeless, why would we ever blindly follow ‘conventional’ wisdom without examining it?

Don’t Be Over Optimistic.

Although optimism is good, too much of it leads to unrealistic expectations and actions.

Lately, it has been difficult to be optimistic, let alone overly so.  However, I’m probably in that mode right now stock from my pre-retirement company. At one point it was up to $80 a share and I am optimistic that it will once day again be at those levels. I probably should go ahead and sell some of it as I have too concentrated a position in that particular stock.

Watch For Changes.

Keep track of news and trends and think through how those might affect your investments (current and future).

Don’t we all wish we had kept a closer eye on the events prior to 2008 and 2009 and sold our positions prior to that!

Don’t Trust The Majority Opinion.

Rely on your research and your analysis, not on talking heads or what everyone else is doing. Warren Buffet didn’t get where he is by following the herd.

Be Careful When Using Non-Investment Criteria To Evaluate Investments.

Ethical investing has become popular lately. Though it has it’s place, you need to ensure that the ethical companies you invest in actually have the potential you need.

Don’t avoid investing in a company due to just one bad example of their product (for instance, don’t avoid investing in Disney stock just because you had it with the crowds at Disney World in Florida!).

Invest With Your Head, Not Your Heart.

Do the analysis and the research and then follow that instead of investing because you like the company, it’s products or it’s people. Of course, if your head and your heart tell you the same thing you know you have a good thing.

Don’t Stay Married To Your Stocks.

Be ready to dump them if they stop performing. I bought Yahoo and Microsoft back when and kept them for quite a while. Although the companies have done well and survived, the stock holders weren’t (in my opinion) rewarded enough so I sold my positions.

Take Losses Quickly, Profits Slowly.

Amateurs hold onto their stocks in hopes that they will make a comeback, pros move quickly to get rid of failing positions.

I confess to being an amateur on this after the 2008 crash. Although the positions are now (mostly) back to the 2007 levels, if I had dumped them quickly enough and then bought in after the crash I would be better off today.

Balance Dividends With Growth.

It doesn’t do much good to get a great dividend yield if your stock price dives. You want stock in companies that are growing as well as ones that pay some dividend.

In today’s economy there is renewed focus on getting good dividend producing stocks.  I used to focus pretty exclusively on growth stocks, so didn’t have this problem for years. Now, in my retirement and in this economy, I am seeking more dividends, but also wanting a stock that will at least grow with inflation.

Don’t Wait For The Top Or Bottom Price To Buy Or Sell.

Take profits while the stock is rising and buy when it is falling – you don’t need to get the rock bottom or very top price to win.

I’ve successfully used ‘good til cancel’ buy and sell orders to do this. I call up my brokerage service and tell them I want to sell xyz stock if it reaches xx price and that order stands until it is filled, until I cancel it or until about 30 days later when it automatically cancels.

Be Flexible With Your Investment Mentality.

Situations and economies change (as we all well know now). Buy and hold strategies may work at one point but not at another, frequent trading might work well now but not later. Taking added risk for income might be needed now, but not in the future.

Examine Your Mistakes, Don’t Excuse Them.

If you make mistakes in investing, study them and learn from them instead of finding excuses for making them. That way, you will do better next time.

This is another piece of timeless advice, in my opinion.

Don’t Trust Tips.

Don’t trust the talking heads, the insiders or your neighbor or Dad. Do the research and analysis to determine if you think the stock is good for your situation.

Average Up Not Down.

A pro will cut their loss and sell fast when stock is going down. They may buy back in if the same stock starts back up (so their average cost goes up). An amateur keeps his losing shares and buys more because they are a bargain.

In other words, sell out of a losing position and buy into an improving one.

I’m not sure I go along with this one, but maybe that is why I haven’t become a billionaire!

Keep Your Capital Moving.

Don’t let your capital get locked into a stagnating investment, watch over it so you can pull it out to move it to a growing investment instead.

I need to get better at this one!

What do you think about these decades old psychological investing tips from David Markstein? Do they still make sense to you in today’s economy? What tips would you add?


Psychological Tips for Successful Stock Investing — 16 Comments

  1. I think many if not most of these are still very applicable today. The current climate definitely requires us to stay on top of our investments and not just go with what might have worked in the past. Great point on Buffett. He commonly says that he’s greedy when others are nervous and vice-versa…meaning don’t just follow what everyone else is doing.

  2. “A pro will cut their loss and sell fast when stock is going down… An amateur keeps his losing shares and buys more because they are a bargain.”

    This is a tough one because you need to understand why the stock is going down and be able to predict if it will bounce back or not. You may end up being sorry that you sold it and missed out on the opportunity to buy more at a discounted price once the stock climbs back up. Or you may end up being sorry you held on to a stock that never recovered. You can’t predict the future, you have to do your research and make as informed a decision as possible.

  3. Great tips. The biggest and best advice that any investor should remember is forget what happened and look at the future. We will all make bad investment choices we just need to limit them. Lastly, do your research

  4. Great advice and I like Kurt’s comment: don’t pay for active management.

    There is one item I’d add to the list: pay attention to the economic cycle. It’s closely related to the one about following your head, not your heart, but it deserves its own mention.

    The economy and the stock market move in longer term cycles, typically 7-10 years, bottom to bottom. And it pays best to sell when everyone’s buying in a frenzy, like in 2006 and 2007 (and as is about to happen here soon). And to buy when everyone’s predicting the end of the world, as in 2009-10. As Mr. Buffett called it: get scared when everyone is greedy and greedy when everyone is scared.

  5. This is one of the best articles I’ve read recently. It resonates so well with me because that’s how I think when it comes to investing.

    “Even if you were taught to find a good stock and hold onto it, you should still review it’s stature and be ready and willing to dump it or buy more as the situation warrants.” — so much for the buy and hold myth.

    I also tend to average up. I don’t understand why we think differently when it comes to investing as we definitely don’t put more money, if our business starts failing. We find ways to make money and when we definitely find a good way to make money, we invest more by learning more about that technique.

    Investing is no different.

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