This Wicked Market

Finance prof Meir Stetman has some useful tips about the psychology of investing. A few examples that resonated with me:

Goldman Sachs is faster than you:…..individual investors should never enter a race against faster runners by trading frequently on every little bit of news (or rumors).

Hindsight error leads us to think that we could have seen in foresight what we see only in hindsight. And it makes us overconfident in our certainty about what's going to happen.

Stop focusing on blame and regret and yesterday and start thinking about today and tomorrow.

Wealth makes us happy, but wealth increases make us even happier.

Related to the last observation is that memories of recent successes are more powerful than those of distant debacles. I am feeling chipper because stocks have recovered sharply from the March abyss. For example, two stocks that I own, Apple and Google, have climbed 90% and 40%, respectively, over the past six months.

However, as of this writing, prices (AAPL - $169; GOOG - $471) are still below their levels of one year ago.

And they’re well off their all-time highs (AAPL - $199.83; GOOG – $741.79) in 2007, as are some of my other investments. Rationally, I should not be feeling happy about my portfolio, which was higher two years ago, but I am.

Abusers know that, by merely letting up on beatings and deprivation, prisoners will feel grateful and even pleased about their improved circumstances. Forgotten are the long stretches of anguish, pain, and despair. And so this wicked market lures me back in. © 2009 Stephen Yuen