What makes a successful investor tick? How do they understand the movement of the world’s markets enough to make substantial returns on their investments? Do they have any special insight?
Many people have theories about how the markets work, from phase of the moon theories to statistical concepts, systems prediction mechanisms similar to weather models (sometimes including weather models!) and so on. While their own personal view of the tides of commerce is being formed, they often forget to include one crucial yet obvious factor: other investors’ psychology. They assume business is noble, logical, when in fact it’s just another extremely human endeavor.
Many businesspeople have gone forth with a thorough understanding of how business “should” work only to be surprised by the human factor, the one major element they didn’t count on. A sale is not just a logical conclusion given certain facts, it is also a matter of relationships, confidence, communication, and other personal issues. A good sales representative knows this, and sells to his clients’ hopes and dreams, insecurities and fears as well as his practical business needs.
So it is with stock markets. The rise and fall of the numbers, individually and collectively, are a product of numerical analysis as well as natural and psychological phenomenon. Many investors are basing decisions on gut feel, personal experience, and other forms of cognitive bias that color any concrete information that they are using. If international shipping is up, an investor’s feeling about the world situation may cause him or her to temper investments anyway, and if weather in Southeast Asia is a factor, a trader’s impression of government readiness to handle a disastrous weather event may hold investment back.
Likewise, an optimistic speech by a charismatic executive in the computer field may raise investment throughout the sector, as investors’judgment includes their positive feelings. Small investors throughout the world may place an unusual amount of their capital in the stock of companies which excite them, using philosophies more suited to poker and blackjack players than professional investors.
Some say that these psychological factors represent just another factor in the equation, and perhaps that’s true, but money is a powerful symbol in people’s lives, and whether the investors are professional or not, fear and excitement are powerful motivators, and inject a volatile component into the markets.
Internationally, the information gap between markets produces an amplification of this – if the markets in Asia are changing, the share indices are focused reflections of a complicated situation, but they can affect the overall movement of markets on other continents. Ripple effects can pass through without any awareness of their cause. To understand every political, social, environmental, psychological factor would be an immense task, so reactions guide many choices, casting the deciding vote in even highly analytical choices.
Does this give any insight into an individual investor’s choices? Is stock market investing more of a crap shoot than it seems? Are people who think they’ve got it figured out fooling themselves? I think that a well informed, intelligent, but also instinctive investor can do quite well, but as in the rest of life there are no guarantees, and you are riding waves, not steering the boat. You have to accept where it takes you. Nevertheless, years of insightful investing will teach you more about how the world and business works than any business school.