Along an ASX stock market investing journey, one will inevitably come up against psychological barriers, intrinsic personality traits that will prevent one from achieving the best results possible from an investing portfolio.
There are many of these barriers and traps. They typically include trying to time the market, following the herd or investing in a hot fad for the fear of missing out on 'easy' gains that others are conspicuously enjoying.
The market correction that we've been enduring over the past few weeks will inevitably bring up another one of these insidious barriers: buying more of your favourite investments after its share price has fallen.
We humans tend to assume that the market's pricing mechanisms are always correct. This can feel great when we buy an ASX stock that subsequently goes up in value. The market is effectively endorsing our decisions, letting us know that we made the right choice by giving us additional money, at least on paper. This isn't really a barrier to success.
However, its evil twin is. Just as we tend to think the market endorses our wins, we also tend to assume that it punishes our losses when the price of an ASX stock that we have already bought falls below our buy price.
If the market is always correct, then it is painfully pointing out our mistakes when this happens. It can be enough to discourage us from buying those shares of our favourite company ever again. Or at least until its ASX stock price goes back up to where it was before, and then even higher.
Only then, you might realise that you've missed a rare opportunity to buy stock of what remains a great business at a firesale price.
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ASX stocks: How to be greedy when others are fearful
There is also the inherent fear factor. If we buy a particular ASX stock at $50 a share, and those shares drop to $40, our brains can have a tendency to tell us that that particular company is a rotten apple, and any subsequent investments will result in another loss of money. That's regardless of the fundamentals of the business, of course. Our brains aren't very good at keeping those at front of mind during a market panic.
Overcoming these biases, these psychological barriers, is mentally challenging. But it is essential to do so if anyone wishes to become a successful investor. But don't take it from me; take it from legendary investor Warren Buffett. Here's some of what Buffett said about buying shares in a different market slump way back in 2000:
If you have a temperament that when others are fearful, you're going to get scared yourself, you know, you are not going to make a lot of money in securities [shares] over time, in all probability…
If they buy a stock and they think if it goes up it's wonderful, and if it goes down it's bad. We think just the opposite. When it goes down, we love it, because we'll buy more. And if it goes up, it kills us to buy more.
So how can we overcome these barriers? Well, I'm not a psychologist. But I can tell you what's worked for me personally.
I too have faced, and occasionally been tripped up by, these psychological trappings. To combat this, I wrote out my investing game plan for the next few years. I thought about what I would do, and which shares I would buy in a market downturn, and I recorded it on a piece of paper that is now pinned to my wall. Before I make any moves in the stock market, buys or sells, I read this paper, and ask myself how this move will fit into my long-term plan.
This worked well for me during the COVID crash of 2020 when I was able to buy shares of many of my favourite ASX businesses at very low stock prices. I am hoping it works for me again during the potentially tough times ahead. Your own mind can be one of the largest barriers you will face on the way to investing success. Knowing this is a victory in itself. But the true victory is having a plan to overcome them and sticking to it.
