Lesson 13: The Psychology of Investing

Value investing 101

In investing you are your own greatest enemy

Let me get straight to the point:
Psychology is by far the most important aspect of investing.

Everything you’ve learned up to this point, valuation, analysis, ratios, and models, can be taught. But what you can’t simply learn is emotional discipline. And that’s exactly what you need to be successful in the long run. Unfortunately, you can’t get this from books, it only comes through experience. However, being aware of the pitfalls in advance helps you learn those real-world lessons much faster.

In my course, this was by far the biggest stumbling block for most participants. That’s why I’m keeping this part deliberately brief. But I strongly encourage you to explore further on your own:

Recommended book: Het Beleggersbrein by Luc Kroeze, highly recommended (in Dutch)
Recommended video: Charlie Munger’s legendary speech: The Psychology of Human Misjudgment

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Why Your Brain Often Gets in the Way

As Charlie Munger once said:

“All I want to know is where I’m going to die, so I never go there.”

What he meant was: understand your own mental mistakes so you can avoid them.

Investors rarely lose money because they’re stupid. They lose because they sabotage themselves:

• They panic and sell.

• They buy out of euphoria.

• They switch strategies at the wrong time.

Or, as Warren Buffett puts it:

“Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”

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System 1 vs. System 2 – How We Think

Psychologist Daniel Kahneman taught us that we think using two systems:

• System 1: fast, intuitive, emotional, reflexive, driven by instinct

• System 2: slow, analytical, rational, used for thoughtful decisions (like investing)

System 1 is why you run if you see a tiger.
System 2 is why you double-check numbers in an annual report.

On the stock market, most people rely on System 1, exactly when they shouldn’t.

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Common Thinking Errors (Biases)

There are dozens of mental biases that can trip up investors. Here are five you’ve probably encountered already:

• Overconfidence: You think you’re right, which is often exactly why you’re wrong.

• Confirmation Bias: You only seek out information that supports your opinion.

• Herding: When everyone is buying or selling, you join in, because “so many people can’t be wrong” (yes, they can).

• Loss Aversion: Losses feel twice as painful as gains. So we hold onto losing stocks too long.

• Action Bias: Doing nothing feels wrong, so we do something, even when it’s often the wrong move.

“Everyone’s a long-term investor… until the market drops.”
— Peter Lynch

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Why Doing Nothing Is So Hard

As Luc Kroeze explains in Het Beleggersbrein, the hardest part of investing isn’t “buy good companies,” or “don’t overpay”… it’s “do nothing.”

“Buy & hold is simple on paper, but damn hard in practice.” Luc Kroeze

When prices crash, your brain starts to question everything:

• “Maybe I should sell?”

• “If only I had sold earlier…”

• “What if…?”

Doubt, fear, regret, they all come rushing in. And in those moments, self-awareness and discipline are the only things that protect you.

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What Can You Do?

• Recognize your biases
  Read up on common thinking traps. Learn to spot when your brain is tricking you.

• Keep an investment journal
  Write down why you buy or sell. You’ll learn more from your own decisions, and your own excuses.

• Delay decisions
  Let big choices “marinate” overnight. Sleep on it at least once.

• Stick to your plan
  If you have a strategy, don’t abandon it under pressure.

• Follow rational voices
  Listen to people who stay calm and clear-headed. Stay away from panic-driven social media.

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Recommended Further Reading/viewing

I kept this lesson short on purpose, so you’d be encouraged to dig into these excellent resources:

• Het Beleggersbrein – Luc Kroeze (Dutch)

• The Psychology of Human Misjudgment – Charlie Munger (YouTube)

• Thinking, Fast and Slow – Daniel Kahneman

• Your Money and Your Brain – Jason Zweig

The art of quality investing by Luc Kroeze in cooperation with Compounding Quality is Luc’s most famous work. Personally, I think Het Beleggersbrein is his most important work, and essential reading for every investor. Sadly so far it’s only available in Dutch.