I've learned a lot of investing principles through the years about how to evaluate a company to see if it's a solid company and cheaply priced. Additionally, I've learned charting techniques known as technical analysis that show the investor the times to be buying or selling a stock.
However, I've learned is that the biggest thing to get your head around is the fact that successful investing is mostly psychological. In other words, the biggest battle is between your ears.
You see, everyone wants to be the next Jim Rogers, John Templeton or Warren Buffett. However, in order to do so, you'll have to learn to win the psychological battle.
For starters, when you should be buying a company is when no one wants it and everyone tells you all the reasons why you shouldn't be in it.
Why buy when no one else is doing it? When no one's rushing in to buy the stock, it's likely trading at a value, a discount to what it should be realistically worth. The negative sentiment that surrounds the stock is the main thing that keeps it from trading at fair value at that moment.
If you can realize that and buy when no one else is willing to buy, you can get a return like others are unlikely to get because they wanted to wait until all of their buddies thought it was a good idea and when the news media finally started touting it once again. But by that time, a stock is minimally fairly valued and more than likely already slightly overvalued.
So the first hurdle is mustering up the strength to buy when everyone tells you it's a stupid time to do so.
Two of the best investments I ever made were when I was practically raked over the coals for being so stupid as to buy something.
Once was when oil was in the $40s. Everyone was saying it was going to $10 and never coming back. Yet it ended up climbing back up to $114 per barrel, despite what "the crowd" thought.
On another occasion, I got my Ultimate Wealth Report subscribers into Italian stocks through an exchange-traded fund (ETF). It was when Europe was crashing and every day their stocks and currency seemed to keep sinking and each day, the news media had it as one of their top stories.
Well, eventually, the ETF got so cheap that I believed it had finally factored in any bad possible news that was likely to come its way. So we bought. We ended up making more than 51 percent in just over a year on that investment.
But to get an outsized gain, I had to be willing to see and do what seemingly no one was willing to do.
The second psychological hurdle you're going to have to master is after you buy the stock. Even though you're likely catching a value, you've still not likely called the bottom.
In other words, the stock isn't going to start going up and not look back after you've bought it. No, typically, here's how it goes.
You buy a stock that's been down for a while. And it continues to go down for a while longer after you've bought it. The temptation is to second-guess yourself.
However, if you know how solid the company is fundamentally (how big it is, how deep its pockets are, how light it's debt is relative to its size, etc.), then you'll have the confidence to stick with your stock during this period IF you choose to focus on the facts rather than how you feel.
But if you aren't convinced of the strength of the actual underlying company, you'll end up selling at a loss, only later to watch that stock make a comeback and you would have made great money in the stock.
You see, you'll find that most people invest emotionally and that's why they're unsuccessful. Emotional investing will cause you to buy too high (when everyone else is excited about the stock) and sell too low, later on.
Additionally, if you think that the stock is taking too long to go up, you may get irrational and sell too. I remember one time, we'd bought a stock and I'd expected it to reach my goal within 12 to 18 months. When it didn't happen quite that quickly, I could have gotten frustrated and sold for a loss. But instead I was patient.
Oh, it ended up taking about two and a half years, but I got the nice profit I was looking for. Had I gotten impatient and irrational, I'd have less money in my pocket.
The next psychological hurdle you'll have is in knowing when it's logically time to sell rather than getting wrapped up in the emotions of the moment that wants to keep you in the stock too long.
One time when I was a broker at Charles Schwab, I had a client that had done well on AOL's stock. Her investing nest egg had grown from the hundreds of thousands of dollars up into the millions of dollars.
I tried to suggest to her to sell enough to where she'd have $1 million in cash that would be outside of her AOL shares. That way, if AOL drastically declined, she'd still be a millionaire.
But greed got a hold of her. She declined and decided to stick it out. You could tell she saw "tens of millions" in her eyes.
What ended up happening? Well, it wasn't long after that when the tech and Internet bubble popped and she was back down to hundreds of thousands again and no more millions.
She never tamed her emotions and therefore she couldn't think rationally nor take anyone else's rational suggestions either.
So why are many investors not successful? It's not because they don't have super-computers with the fastest Internet connections, etc. It's because they don't pass these psychological tests. You've got to pass them all in order to get to your profit.
Passing one or two hurdles in investing isn't enough. You've got to pass every psychological hurdle I've mentioned in order to get from your buy price to a sell price that reaps you a great return.
So what are Jim Rogers, John Templeton and Warren Buffett good at? Passing these psychological hurdles, which keeps them focused on the facts of the strength of their companies rather than the emotions of how they feel at any one point along the journey from the buy to selling point.
I hope you'll remember this very crucial investing lesson when you make your next stock purchase.
About the Author: Sean Hyman
Sean Hyman is a member of the Newsmax Financial Brain Trust. Click Here to read more of his articles. He is also the editor of Ultimate Wealth Report. Discover more by Clicking Here Now.
© 2021 Newsmax Finance. All rights reserved.