The Psychology of Investing

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So knowing this is a losing game, say you decide to put $1,000 into a savings account. For this example, I’ll even pretend that savings rates rebound and they just barely keep pace with inflation at 3%. After 30 years, that $1,000 will be about $2,500. On the other hand, if you took on more risk and invested that $1,000 in the stock market, after 30 years, assuming an average return of 10%, it will be worth nearly $20,000. That’s a difference of $17,500!

Since it’s inception in 1926, small and large company stocks have returned over 10% a year.  For long-term savings, it’s a complete no-brainer.

And you know what’s even more compelling? People who have learned to control their emotions can be the best investors. Take Warren Buffett—one of the most successful investors in history—he’s taken this concept to an entirely different level. His mantra is to “be greedy when others are fearful and fearful when others are greedy.” Buffett made his fortune by being a “contrarian investor.” He went against the grain and bought companies with depressed stock prices, searching for untapped long-term value in the “ugly duckling” stocks that no one else wanted to buy. Conversely, during the tech bubble of the 1990s, his company Berkshire Hathaway did not invest in a single technology stock. The reason, Buffett said, was that he avoided the entire technology sector because he didn’t understand the company business models and couldn’t predict earnings. That “invest in what you know” rule is something we can discuss another time, but what’s relevant to our topic today is that Buffett wasn’t swayed by group think; He let people call him a dinosaur and sat out the tech craze, saving himself a lot of money in the process

Of course, Warren Buffett is a masterful investor and we can’t all be as successful with a contrarian investment plan, but we can definitely take a page from his book and be wary of crowd behavior when it comes to investing.

 

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