Investing is a journey that combines both financial knowledge and psychology. While conducting fundamental research is crucial, an investor’s ability to manage their emotions and thought patterns is equally important for achieving success. Even the most seasoned investors can sometimes stumble due to their own emotional vulnerabilities. They don’t always reveal that they are skilled at overcoming these weaknesses.
Financial skills can be taught in business schools, but mastering the psychology of investing and controlling one’s emotions is a far more challenging skill, and it’s best honed through real-life investment experiences. Fortunately, I have a valuable guide to share.
In this article, I’ll provide ten lessons to help us enhance our own investment mindset and avoid common behavioral mistakes.
#1 – Nothing Comes for Free
There’s no such thing as a free lunch. Everything worth pursuing comes with associated costs. In the world of cryptocurrency, the price of chasing significant gains is the ability to endure extreme volatility. Crypto can offer life-changing profits within months, but it’s also known for its high price fluctuations. To reap high rewards, investors often have to bear substantial losses. They need the mental fortitude to handle this volatility and manage the emotions that come with watching their portfolios fluctuate.
Over the long term, crypto investors who can withstand this volatility tend to see positive returns. For example, Ethereum (ETH) has experienced multiple 50%+ drops in its seven-year history. Investors who panic and seek quick profits usually exit the market early. Those who study fundamentals and stay resilient continue to profit.
#2 – No One Is Irrational
Our personal experiences shape our worldview, including how we handle money and investments. There’s no single “right” or “wrong” way to invest; it depends on an individual’s risk tolerance, time horizon, and financial goals. For example, meme coins might seem like a poor investment to seasoned investors, but for newcomers or those with limited interest in crypto, they can serve as speculative assets to achieve financial objectives.
Different investors have different preferences, and this diversity leads to various perspectives. Avoid judging others’ decisions, as everyone in the market is pursuing their unique financial journey.
#3 – Luck vs. Risk
Luck and risk are two sides of the same coin.
Both can impact unforeseen events that affect investment returns. Smart investors prioritize risk management, diversifying their portfolios and using hedging strategies. Luck can also play a significant role in investment returns. The world’s most successful people have often been in the right place at the right time. To reduce bias, try to find role models with qualities you can realistically emulate.
#4 – Contentment Matters
Greed is a potent, addictive force. A desire for more is natural when it drives people to work harder and improve their lives. However, when greed turns into unrealistic expectations, it can lead to reckless risk-taking, especially in the world of crypto, where FOMO reigns during bullish markets.
The mistake of feeling inadequate can lead to reckless risk-taking and ruin. Su Zhu and Kyle Davies, co-founders of the hedge fund 3AC, might have lived like kings with their profits during the 2020-2021 bullish market. However, their desire for more eventually led to the downfall of their company as they took on more leverage for riskier bets.
Don’t compare yourself to others, focus on your own standards and financial goals, and always aim to be content without exceeding your current income.
#5 – Money as a Tool for Freedom
Crypto isn’t just about wealth; it’s about freedom. It empowers individuals to control their time and live life on their terms. Positive freedom, as philosophers call it, expands your control over your life, bringing you closer to a state where you can live each day according to your desires.
#6 – The Power of Compound Growth
Compound interest is a remarkable force that can multiply wealth over time. While short-term market fluctuations can be distracting, don’t forget that significant gains often come from compounding investments over the long term. Take Warren Buffett, for instance, known for his long-term approach. Most of his wealth was accumulated after age 59, illustrating the power of compounding.
Of course, Buffett is also a brilliant investor with a knack for making very good bets. But we can see that most of Buffett’s wealth can be attributed to being in the market for a long time to compound massive gains.
The same principle can be applied to crypto as the space continues to grow over the coming decades.
#7 – Gaining and Preserving Wealth
Gaining and preserving wealth require different mindsets.
To become wealthy, one has to be optimistic. This is because optimists are more willing to take personal and/or financial risks, go against the grain, and see potential in ideas, businesses, or projects that have the potential for significant returns.
However, to preserve wealth, one has to be conservative. This doesn’t mean hoarding money under the mattress. But it’s wiser to employ a balanced and more cautious mindset and investment strategy when the priority is to protect, not grow, one’s capital.
You should handle your money with the wisdom of a conservative while investing with the optimism of an opportunist.
#8 – Pragmatism Over Rationality
Strive to make practical decisions that suit your current situation, even if they don’t always align with rational thinking. For example, consider dollar-cost averaging (DCA) over a lump-sum investment. While rationality might favor a lump sum, DCA can help reduce regret if prices drop soon after investing.
#9 – Embrace Change
People change, and so do their life preferences. It’s easy to underestimate how much life changes can impact financial goals. As life evolves, so should your investment strategy. Maintain a balance between risk-taking and conservatism when planning your finances.
#10 – Embrace Optimism
While pessimism may sound smart and realistic, it’s usually more profitable to be optimistic in the long run.
The pull towards pessimism is partly driven by the nature of good and bad news. It’s easier to notice when bad things happen since they usually happen suddenly, while the benefits of good news take time to materialize.
For example, Terra’s rapid collapse, wiping out tens of billions in just a few days. A crypto pessimist might point to this as a reason why crypto overall is a failure. But in doing so, a pessimist would overlook the fact that over the last 14 years, crypto has still managed to create a trillion-dollar ecosystem that is independent, powerful, and resilient, capable of withstanding extreme events like the collapse of an 11-digit market capitalization stablecoin without government intervention. An optimist would point out that despite the chaos, we are still standing.
The crypto market has endured crises but continues to grow. Optimism can help us see the bigger picture and how we’re still building, even in the face of setbacks.
So, pessimism may sell in the market. But in the long run, it’s usually more profitable to be optimistic.