But many of these survival mechanisms that are hardwired in our brain are utterly useless to us as far as investing goes. In fact, they actually hurt us, and if you guys want to learn more about this, a lot of this information, a lot of this stuff that I learned, came from the book Unshakeable by Tony Robbins. I have it linked up in the description below if you guys wanna check that out, but I highly recommend reading that if you want to learn about the reason we do what we do when we invest, the reason most people lose money in the stock market. But I’m gonna kinda give you guys a snapshot of why this is, and the psychological reasons why we follow the market.
So basically this is what the market looks like at any point in time. When it goes up in value we have demand, so when there’s a demand for a stock or a demand for the market it goes up in value, the actual price of that goes up in value. So I know I’ve talked about this before if you guys are familiar with my channel, I talk about how the value of something largely doesn’t change on a short term basis, yet the price of it changes very erratically, especially with stocks. So when there’s a demand for a particular investment, the price of it goes up significantly in value while the underlying value really doesn’t change, it’s just the price that changes. So when there’s a high demand for a certain investment, the price gets pushed up into a point of greed or optimism. Now, when there’s a supply heading to the market, when people lose faith in that stock, it starts going down in value into a state of pessimism, or fear, while the underlying value or the intrinsic value of that investment really doesn’t change.
So you see this constant pendulum swing of optimism and pessimism, neither of which are sustainable, and this comes from the teachings of Benjamin Graham through The Intelligent Investor. So I just want you guys to have this idea here in your head of the market swinging to the point of optimism, and then back to the point of pessimism, and then falling somewhere in between, understanding that what goes up must go down. And even when something goes way down in value, that’s not a sustainable point because people are going to buy back into it, driving the demand up, which is going to drive that price up.
So now I want to explain how people make money in the stock market, there’s three types of people out there. We have the bulls, we have the bears, and then we have the sheep, okay. So bulls or bullish investors make money from rising stock prices.
They buy stocks when they’re lower in price, and then they sell them when they’re higher in price. This is called a bull, okay. Now we have the bears, bears are people who make money in a bear market, or from falling stock prices, so they’re the short sellers. They buy a stock when it’s way up in the area of optimism and they know that that’s not possibly sustainable, so they basically borrow shares at a higher price and then they buy back those shares at a lower price and they make money from the price difference of those two things.
And then we have the sheep, this is the majority of the market. The sheep, basically they follow the herd, and sheep get slaughtered. Sheep are the ones who make no money in the stock market, in fact most times they lose money. That is because the sheep are following the herd or they’re following the actual trend of the market, so you have to decide what you wanna do. Are you gonna be a bear, are you gonna be a bull, or are you gonna be a sheep?
But I hope you don’t wanna be one of these sheep who get slaughtered by the market, because nobody wants to lose money or be taught a lesson like that. Most people get involved in the market because they want to make money. So I want to explain to you guys why we have this tendency to be sheep. Why do we have this, why are we pushed to follow the market?
There’s a lot of reasons, so I don’t want you to feel bad or feel like you’re an idiot, this is just your survival mechanisms in place and the things that the actual media pushes you to do, if you’re somebody who follows Wall Street news. So first of all, why do we buy high? Why is it that we see a stock going way up in value and we go oh my gosh, we better buy into that? Because if you ask anyone out there about investing, if you say hey, could I get some advice on investing in the stock market? And they tell you to buy low and sell high, you’re gonna be like well (scoffs) you know, that’s obvious, of course, like give me some real advice.
But the thing is, nobody does this, everyone buys high and sells low, okay? And there’s reasons we do this. Why do we buy high? The first reason is others are doing it, and we are falling into that herd mentality, or most of us anyway, so when we see our friends doing it, when we hear about everyone buying into a particular stock, we go oh, wow, wow, that must be a good stock, I should probably buy into it. So when we see others around us doing something, we think it’s a good idea.
We go, well, you know, all the people I know are investing in this stock, so I should invest in that stock as well, so that’s the herd mentality. We follow what everyone else is doing. The next reason is we like to celebrate. The truth is, we like when things are going up in value, we like to buy what’s hot, we like to buy the darling of Wall Street. We hear about it, we’re like oh my gosh, yeah. Everyone loves this stock, I wanna own this stock too so I can tell my friends I’m holding shares of that stock as well, so we can all celebrate about it and feel good about it.
So we like to celebrate. As a result, we like to buy the winners, okay, but the truth is, today’s winners are usually tomorrow’s losers, so if you’re investing in a stock and you’re buying that hot stock and then you go and you tell your friends, oh, yeah, I own this stock. They’re gonna be like oh, yeah, you know what?
I own that stock too, we’re all celebrating, we’re all having a good time. But if you buy one of the dogs, one of these stocks that is a loser right now, everyone’s gonna look at you like you have two heads, they’re gonna be like, wait, why are you buying that? That’s because you understand that you need to go against the prevailing trend. You need to buy low and sell high, so you need to buy today’s loser. So we also have this tendency to follow the leader, so we see what stocks are performing best in the market and we buy those stocks, because those are the ones that are the best of the best, and because they’re up right now we think these are the best stocks to invest in, but the unfortunate truth is, many of those stocks are pushing into a point of unsustainable optimism at that point.
Now, another reason we do this is because Wall Street pushes this. Wall Street pushes the hot stocks, they talk about what stocks are up big today, and those are the stocks that basically get in front of us as far as news outlets go and they’re the stocks that are in our mind, they’re the stocks that people are talkin’ about. And as a result, they’re the stocks that people most frequently invest in. Also, we have recency bias. Recency bias essentially means that recent events carry more weight in our mind, so when we’re in a bull market and basically everyone’s making money and the markets are going up and up and up day after day, we think that that is going to be what happens in the future, because that is what happened most recently, and this is not true, because at any point the markets could turn and start going down in value. But because of recency bias, because good times are more recent in our minds, we think the good times are gonna keep on rolling.
The other reason we buy high is overconfidence. This may not be overconfidence in yourself, it could be overconfidence in someone else’s ability. So if you have too much confidence in some Wall Street analyst and you go all in and you say oh, there’s no way they could be wrong, and you dump all of your money into what they think, that’s overconfidence. Or if you have overconfidence in your own ability and you think that you can’t possibly go wrong, that’s another way you can be overconfident, but these are the main reason, guys, that we follow the market, and this is the reason why the majority of investors out there buy high. And hopefully you’re starting to realize why we’re hardwired to do this, and in order to do the opposite and buy low you have to make rational decisions, you have to make unemotional decisions, or emotionless decisions.
You have to leave your emotions at the door and do the opposite of what everyone else is doing. Next let’s talk about why we sell low. So why is it that when all of a sudden the supply is going to the market and we see us losing money, why would you sell at that point, when you’re down money? If you bought up here and you bought at the top of the market, and then all of a sudden it’s falling in value, why would it make sense to sell?
Why would it make sense if you’re down $1000, if you’re down 10% on your investment, why would you sell? Does that make sense to sell and lose $1000? Absolutely not, but most people do this.
First of all, this is risk aversion, so basically this is the idea of, well I don’t wanna lose any more money, so I might as well just take the loss. So we’re trying to avoid losing more money by taking a smaller loss, and this is a losing strategy. Another reason is the fact that a loss is two times more painful than a win is joyful, this is a psychological thing that goes on in our minds, so that is why people who gamble, when you make money you feel really good, you know, you get all kinds of excitement. But when you lose money, you feel really, really bad, and many people go into a depression.
Think about relationships, too, you know. When you’re in a relationship and you’re with someone and you’re in love with someone, you’re really happy and everything, but then all of a sudden you lose someone and you’re like, oh my God, that really, really hurts. That’s because a loss is two times more painful than a win is joyful, okay, so when we lose money it really freakin’ hurts, that’s why this triggers loss aversion where we don’t wanna lose any more money and feel even worse, when really your best bet is to just hold on to what you have and buy whatever else is really down in value during a bear market.
The other reason is because Wall Street pushes this. Wait a second, didn’t I just say Wall Street pushes us to buy high, but now they’re also pushing us to sell low? Why could that be? Could it possible be because Wall Street makes money when we’re active? Could that be the reason?
Because that’s exactly the reason. You have to understand, the idea for Wall Street, what their point is, is to generate buzz, they want us to be active. They want us to trade in and out of stocks because when we do that we rack up commission costs and that’s how Wall Street brokers make money is when we trade in and out of stocks and when we’re active with our money. They make money when we’re active, whether or not we are buying, whether or not we are selling, they don’t care if we make money because they make money no matter what. They don’t care what the markets do, because they’re making money when we’re active, when we’re moving our money around. They’re making money on commission costs.
So that is why Wall Street will push us to be active no matter what, so understand that largely most of what we see on Wall Street is just noise and you need to just filter that out. Another reason, too, is recency bias, this is the same thing as before. When things are going bad, and when we have multiple bad days or multiple bad weeks in a row, that’s what’s most recent in your mind, so you think the bad times are just going to continue because that’s what’s most recent in your mind. So due to that recency bias, we have a tendency to think the bad times are never going to end, and as a result we want to avoid losing even more money and feeling even crappier about ourselves, so we just cut our losses. Another reason is lack of confidence, and the problem with this stems from overconfidence in the beginning.
So if you invest in a stock and you haven’t done your research, you don’t have faith in that investment long term. When you invest in a stock, you should be looking at that stock and going, okay, in 10 years will the actual value of this company be worth more, be worth less, or worth the same? And if you know that that company will be worth more money down the road, you’re not gonna worry about short term price swings, but if you haven’t done your research and you don’t have faith in that company and all of a sudden that stock goes down in value, your lack of confidence in that company is going to trigger you to say, oh gosh, I better sell low and cut my losses. The other reason is because other people are doing it. Other people around you, everyone who invested in these darlings of Wall Street, everybody lost money because now those stocks fell in value because they were in a state of unsustainable optimism.
So now all of your friends are selling, and all of your friends are saying oh gosh, I’m losing money, I better sell before I lose even more money. So you see what your friends are doing and you go oh, wow, yeah, I should probably do that too. It’s a losing strategy, you have to make your own decisions, don’t worry about what Wall Street analysts say. Don’t worry about what your friends or what everyone else is doing. You have to go against what everyone else is doing in order to be successful in the stock market. The other reason, and this is a big one as well, this is impatience.
If you invest in a stock, you have to be in that stock for the long term, and if you make a mistake then you have to eat it. So what I mean by that is, if you invest in a stock and it goes down in value you’re gonna have to go, welp, I may be sitting on this for a long damn time, because I have to wait for it to go up in value before I sell, while most people, what they do, is they go down on an investment, then all of a sudden they’re like, you know what, I don’t like that stock anymore, I don’t wanna hold that stock anymore, and they start searchin’ around and they find another hot stock. So basically, today’s winner was tomorrow’s loser, okay. Now it’s tomorrow, and they’re holding a loser and they wanna sell today’s loser and buy today’s winner, which is going to be tomorrow’s loser.
So essentially what they’re doing is selling whatever is not hot anymore and they wanna buy the new hot stock, which is going to be a loser. It’s going to be the loser in the future because it’s being pushed to a point of unsustainable optimism. So because people are impatient, they wanna sell what they have, they don’t wanna hold on to the stock, they don’t wanna be stuck with it for many years, they don’t wanna sit there and wait for it to come up in value. You have to think long term with investments, and when you invest in a stock you really have to commit to it.
Those are the only people who are really time after time making money in the stock market, are the people who really have confidence in their investment, they do their research, and they invest long term, and they just do the opposite of what the market does. So hopefully you understand now, guys, that you’re going to want to do the wrong thing. Your mind is going to trigger, your survival mechanisms are going to trigger you to do the exact wrong thing at the exact wrong time, and you have to do the exact opposite of what everyone else is doing.
I wanna leave you with two quotes from brilliant investors. First of all we have Warren Buffett, he says “We should be greedy when others are fearful, “and fearful when others are greedy.” So when people are being greedy and stocks are up here, that’s a time to be fearful, that’s when we should go okay, this is getting a little bit out of hand, alright. And then when people are being fearful that’s when we should be greedy, that’s when we should be throwing out money left and right, buying whatever we can.
The other thing I’m going to leave you with is the words of Benjamin Graham, who was actually the mentor of Warren Buffett. He kinda taught Warren Buffett everything he knows about investing. He says that “We should buy from the pessimists “and sell to the optimists.” The consistent message here that I’m hoping you’re receiving is to buy low and sell high, and I’m hoping that after seeing this and understanding why we do what we do, you understand why this is so important. Anyways guys, I hope you enjoyed this video, this is the number one mistake people make when investing.
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