Use Nofsinger’s “The Psychology of Investing” to uncover your financial biases, avoid these common mistakes in investing, and adopt a sound financial strategy. Apply this knowledge to endure times of uncertainty, and capitalize on behavioral finance opportunities in the financial markets.
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THE PSYCHOLOGY OF INVESTING AT A GLANCE
Table of Contents
This is one of the most compact and succinct reads I have in my financial library. It is easy to read and understand, and it is very practical. I appreciate that it covers a lot of ground at a high level and that it equips readers for “real” use in personal finances.
The author doesn’t pretend to know everything, and the book makes no statements like “this is the only way” or otherwise guarantee of results. Rather, it is a reference and a powerful light to shine on financial biases (personal and as an industry) and look for areas of improvement.
I read several times, and quickly realized areas where I stood to improve. Since then, I keep it close and frequently review it. Everyone should have a copy, and I most certainly recommend picking up a copy today! Ready to enhance your financial strategy? Don’t wait – get Mr. John R. Nofsinger’s book, today!
Resource Richness and Readability of The Psychology of Investing
As I mentioned previously, there is a lot of material in a relatively small book on behavioral finance. Which I like! In my opinion, there are far too many books on investing that go on, and on, and ON about very similar points thereby doing readers a disservice in wasting their time. Mr. Nofsinger cuts to the chase, makes his points clear for all levels of readers with varying degrees of expertise, and then moves on.
However, with the quick tempo, he doesn’t stray from complex topics and strikes a balance with a degree of detail and thoroughness. For visual learners, there are a lot of helpful graphs and charts sprinkled throughout as well. He also has a good sense of humor and wit about him which makes any book on investor psychology even better!
Adaptability and Application of The Psychology of Investing
Even with all the readability, there is more than “just” psychology investment theory. This book is highly actionable, can be (and should be) used introspectively, and I think there is something for everyone. To be clear, Mr. Nofsinger is not saying “don’t read other books” instead I believe he encourages further research and reading. Perhaps, think of this book as the proverbial tip of the iceberg.
This book also points out areas of disagreement; it exposes and challenges conventional ways of thinking about personal finances. Throughout it all, and very much to my enjoyment, Mr. Nofsinger also provides suggestions. Not all investing material will do that – some just simply identify differences or challenges to established methods. Friend, this is very helpful!
HOW TO USE THE PSYCHOLOGY OF INVESTING IN YOUR MONEY MATTERS
Apply what you read in this book to what you’ve already heard about stock market psychology, behavioral investing, and investor psychology. All of it starts with getting your own personal financial biases under control! Next time you check the activity in the financial markets, look at your retirement accounts or are experimenting with your online brokerage you will have a backdrop and standard with which to filter the information. This is a fundamental component of developing Mêtis in your Money Matters!
Know thyself…
Mr. Nofsinger opens chapter 1 outlining two established standards established over the decades: “people make rational decisions” and “people are unbiased in their predictions about the future.” From there, and through the rest of the book, he explains why that (and other points) are not necessarily the case. In fact, these core assumptions are “bad” and “people often act in a seemingly irrational manner and make predictable errors.” The book then goes into all manner of questioning and suggestion about what is actually the case. We are all consistently inconsistent, and that’s where the book helps readers uncover this individually and in the market overall.
Understanding your Psychological biases and Strategies to Beat them!
The book covers myriad topics under the umbrella of the psychology of investing. For example, Mr. Nofsinger delves into the impact of these biases on investors:
- Overconfidence (in terms of ability, knowledge, and perception of future events),
- The Illusion of Control (believing “they have influence over the outcome of uncontrollable events”)
- The Disposition Effect (selling winners instead of trimming out losers),
- Managing Risk Aversion (less risk-taking after a loss),
- Mental Budgeting, (which deals with the “emotional pain” of selling losers and how it “may be less distressing for the investor to sell the listing stock later as opposed to earlier.”)
And there are many more! All of these are a good place to start. Starting with the individual (you and me) and working through the entire financial system, these all exist in one form or another in the financial markets.
With this list in mind, I’d like to focus on the strategies he provides to combat these biases (and others), and I’ve provided a few points from his book for your consideration in this review:
“Understand the Biases”
Start with this book! Reading it is a great way to make progress. Identify biases in yourself and in others, and try to avoid the influence.
“Know Why You’re Investing”
This is important! Your goals will drive different investment choices, and “vague notions do little to give you investment direction.”
“Have Quantitative Investment Criteria”
This ties into the previous point and continues the thought. Write down detailed goals, and “investment criteria” before you pull the trigger. When you have a selection, compare the attributes against your criteria. “If it doesn’t meet your criteria, don’t invest!”
“Diversify”
Invest broadly, across several stocks and types of stocks; avoid buying stock in the firm you work for; buy bonds as well!
“Control Your Investing Environment”
Keep an eye on your portfolio on a regular and established interval. Trade monthly (not more frequently) as needed, and take a look at the big picture (i.e “portfolio”) once a year.
How we apply Nofsinger’s book to refine Mêtis in our Money Matters
When I found this first edition, I immediately realized I was making some poor investment decisions and took aggressive action to “right the ship” as quickly as possible. Fortunately, at the time I only had a few investments and it was a relatively low financial impact on me.
Since then, I try to be careful about my investment strategies and take note of my progress or target areas of opportunity within my approach. For example, the information on diversification, and knowing why I’m investing are always on my mind. Even if I find a great investment opportunity, I keep in mind the “why” behind my financial plan and if the investment falls out of scope then I don’t make the transaction.
This book has been and will continue to be, a cornerstone in our money matters. I recommend it to anyone! I hope it can serve you well. Buy a copy today, and continue to financially empower yourself!
Teamwork!
In all of this, an extremely important part has been to be on the same page with my spouse. Money issues are a great way to strain a marriage and my wife and I have made a dedicated effort to talk through what we are doing and jointly agree on the path forward. We have a healthy debate on what we disagree about and work through it until resolution. Together, we step forward in our financial journey!
I wish you the best of luck in your endeavors! Keep up the hard work, keep developing yourself, and keep cultivating Mêtis in your Money Matters. Diligently pursue excellence in your finances, my friends!
Here are a few more posts that might interest you:
- Answer these Questions before Investing in a Financial Product
- Be Intentional with Your Investments
- 48 Days to the Work You Love
- Winning the Loser’s Game
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