Investing psychology is a subject most books and so-called professionals keep separate from the mechanics and strategies of proper investing. A reality, largely misunderstood, is that the underlying mechanics and strategies within investing are a direct function of your psychological belief system. At any given time in the stock market, there are buy and sell invitations sent out in the form of news events, technical indicators, earnings reports, company announcements, brokerage upgrades and downgrades and much more. These invitations are then received by the belief systems of hundreds of millions of investors worldwide.
What separates the consistently profitable market player from everyone else is a psychological belief system that filters all these invitations to buy and sell through the markets ongoing supply and demand relationship. When this is done properly, you will quickly realize for example, that often a buy recommendation from a brokerage firm and/or a good earnings report from a company do not equate to market demand or higher prices for the company’s stock. Conversely, negative news or a brokerage downgrade may actually be a low risk/high reward buying opportunity. Some of the most common and popular invitations to buy and sell occur with stocks.
A psychological belief system that enjoys consistent low risk/high reward profits is one that identifies and accepts an invitation to buy into a market when objectively, market price is at a level where demand greatly exceeds supply (wholesale prices). A belief system that suffers consistent poor results is one that identifies and accepts an invitation to buy into a market when objectively, price is at a level where supply exceeds demand (retail prices). There are two types of buy and sell invitations. The first are the markets buy and sell invitations which are based only on the governing dynamics of supply and demand. The second includes everything from good and bad news, to positive and negative earnings reports, to brokerage upgrades and downgrades, etc. The first has you focus on reality while the second has you focus on everything but reality.