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Table of Contents
- The Psychology of Investing
- Meet the Investor Tribes
- Psychological Biases at Play
- Finding Your Tribe: What Strategy Suits You Best?
- Conclusion: Aligning Your Investment Strategy with Your Personality
1. The Psychology of Investing
In today’s market scenario, it’s easy to feel confused and overwhelmed.
With interest rates swinging, inflation rising, and news headlines creating panic, how should one decide when to invest, where to invest, or even whether to stay invested?
Investors are often stuck with questions like:
- Should I invest the surplus now or wait for a correction?
- Should I stop my SIPs because the market is high?
- Should I sell and book profits now?
In the real world, investment decisions aren’t purely analytical; they’re deeply emotional.
In this article, we explore the psychology of investing and the five major investing mind-sets that often dictate investor success or failure.
Recognizing which “tribe” you belong to could dramatically improve how you approach mutual fund investing.
2. Meet the Investor Tribes
Lee Freeman-Shor’s book, The Art of Execution, delves deep into the psychology of investors, uncovering how different mind-sets shape portfolio performance.
Freeman-Shor conducted a fascinating seven-year study on 45 elite investors managing up to $150 million.
What did he find? Despite these investors being experts, a shocking 49% of their “best ideas” didn’t make money.
It wasn’t about the investments themselves; it was about how they executed those investments—whether they were winning or losing.
Freeman-Shor classified these investors into five distinct “tribes,” based on how they reacted to both losing and winning positions.
Investor mind-sets can be categorized into five types: Rabbits, Assassins, Hunters, Raiders, and Connoisseurs. Each type responds differently to market fluctuations and follows distinct strategies for managing losses and profits.
Let’s dive into these tribes and see what separates the winners from the underperformers.
i.) The Paralysed Investor: Stuck in the Past
Have you ever frozen when a stock starts to tank, holding onto the hope that it will recover? This is what Freeman-Shor calls the “Rabbits.”
Much like a rabbit caught in headlights, these investors are paralyzed when faced with a losing position.
They cling to their investments, hoping for a rebound that never happens.
Why do they do this? It’s often due to a mix of denial, emotional attachment to their original analysis, and the sunk cost fallacy.
They’re afraid of admitting that they were wrong, and in turn, they let their investments slide further into the red.
Imagine an investor who put a lump sum into a sectoral mutual fund like the Nippon India Pharma Fund during a healthcare boom.
But the sector undergoes a prolonged slowdown. The fund underperforms for years, yet the investor holds on, saying, “It’ll come back,” instead of switching to a diversified equity fund or rebalancing.
The lesson here? Sometimes, doing nothing is the worst thing you can do in investing.
ii.) The Disciplined Investor: Cutting Losses Effectively
On the other side of the spectrum are the “Assassins”—investors who have mastered the art of cutting losses.
These investors quickly sell losing positions to protect their capital. Their approach is ruthless, but effective.
By following strict rules, such as cutting losses at a predetermined threshold (typically 20-33%), they prevent small losses from turning into catastrophes.
Do you have the discipline to pull the trigger when things aren’t going well, or do you let your emotions dictate your moves?
Say you invest in ICICI Prudential Commodities Fund, expecting a commodities rally.
But within six months, global commodity prices drop and your fund falls 20%.
As an Assassin, you’ve pre-decided to exit if the fund drops beyond 15%, and you act on it—redeeming the amount and reallocating to a large-cap fund like SBI Blue-chip Fund.
The Assassins prove that timely action can protect your portfolio and free up capital for more promising opportunities.
iii.) The Opportunistic Investor: Buying the Dip
Then there are the “Hunters”—investors who see a sharp drop in price as a chance to buy more.
They don’t panic when the market moves against them. Instead, they double down on their original thesis, viewing the setback as an opportunity to lower their cost basis.
Do you have the conviction to hold onto your beliefs, even when the market seems to be telling you otherwise?
Let’s say you’re doing SIPs in the Kotak Emerging Equity Fund (a midcap fund), and due to market correction, it shows -10% returns in a year.
But you believe in India’s midcap growth story. Instead of stopping the SIP, you increase the SIP amount, using the dip to your advantage.
Successful Hunters can distinguish between a short-term setback and a fundamental issue, positioning themselves for greater rewards when the market recovers.
iv.) The Quick-Flicker Investor: Selling Winners Too Early
Let’s now consider the “Raiders”—investors who sell their winners too soon.
They’re quick to lock in small gains, often out of fear of losing what they’ve already gained.
While this might seem prudent in the short term, it limits the long-term growth of their portfolios.
Is fear of losing what you’ve gained keeping you from bigger rewards?
An investor sees a 12% return in 10 months from Canara Robeco Flexi Cap Fund and immediately redeems it, fearing the market might crash.
However, had they stayed invested for three years, the fund could have delivered 45%–60% compounded returns.
The Raiders teach us that sometimes, you need to let your winners run and not be afraid to ride them for longer-term returns.
v.) The Visionary Investor: Letting Winners Run
Finally, there are the “Connoisseurs”—the investors who truly understand the value of patience.
Despite losing money on 60% of their picks, they still outperform the average due to their ability to let winners run.
They focus on concentrated portfolios with long-term growth potential, holding onto stocks for years and avoiding premature exits.
How long-term is your investment strategy?
Imagine that you started investing in Parag Parikh Flexi Cap Fund through SIPs five years ago.
Despite short-term volatility, you didn’t redeem because you trusted the fund manager’s strategy and stuck to your financial goal.
Today, the fund has delivered excellent long-term returns, validating your patience.
The Connoisseurs show us that by focusing on quality and allowing time for growth, wealth creation can occur over time, even if some picks don’t work out.
3. Psychological Biases at Play
Each tribe has its own set of biases, from fear to overconfidence, all of which influence how decisions are made.
By understanding these biases and how they affect your investment choices, you can become more self-aware and better prepared to make informed decisions.
Can you identify your own biases?
Are you prone to the sunk cost fallacy, or do you jump in at the first sign of a drop in price?
Recognizing these biases is the first step in overcoming them and improving your investment results.
4. Finding Your Tribe: What Strategy Suits You Best?
So, which tribe do you belong to? Do you freeze when things go wrong, or do you cut losses swiftly?
Are you someone who takes advantage of price drops, or do you sell at the first sign of profit?
Understanding your investor personality and aligning it with a strategy that suits you is key to long-term success.
Have you ever asked yourself: Are you staying true to your strategy, or are you jumping between different approaches based on market movements?
5. Conclusion: Aligning Your Investment Strategy with Your Personality
The most successful investors understand one thing: you must align your strategy with your personality.
Whether you cut losses like an Assassin or let your winners run like a Connoisseur, consistency is crucial.
The best investment strategy is the one that aligns with your natural tendencies and helps you stay calm during turbulent times.
And if you find yourself struggling to identify your optimal strategy or struggling to execute it, consulting with a Certified Financial Planner (CFP) could be the key to crafting a strategy that suits your financial goals and risk tolerance.
A CFP can guide you in understanding your unique investor psychology and help you stay on track toward long-term wealth creation.
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