In learning investing basics, you will experience 12 stages of investment interest.
There are 12 stages in what I consider the novice investor’s cycle, but they can actually be applied by anyone. Let’s look at these one by one. Then I will show you why there are a lot fewer stages for the billionaire thinker than someone learning investing basics.
The first stage of investment interest is characterized by optimism. So far, so good. After all, we’ve seen that optimism is a characteristic of billionaire thinking. But how does it operate in the mind of an aspiring billionaire whose goal at this point is simply to buy low and sell high? At this investing basics stage, investors have embarked on a journey into a big new world. Their hopes are high as they start crunching the numbers on the calculator to make early retirement more of a reality — not to mention the private jet and the European vacation.
The second stage is excitement. When there’s an initial increase in the market, the investor is on cloud nine. At this point of investing basics, you are further calculating numbers and looking at the possibilities of growth if you put more money into your investments.
Stage three is increased excitement — thrill, in fact. You cannot believe how much everything is moving up and how quickly it’s happening. You are thinking about retiring in the next couple of days if things continue going the way they are. This is so easy! Why didn’t you think of it before?
Stage four is absolute euphoria — and this is the point of maximum financial risk, where the market is flying too high to be true. Investments are overvalued, and individuals are seeking high-risk investments to finance their short-term goals.
Now stage five begins. It’s characterized by growing anxiety. Maybe the market has begun to pull back a little, and you’re realizing that making money on the market is not as easy as it once was. You are in a state of unease as your future becomes uncertain and you are somewhat concerned about your investments. But will you get out? No, because the market has been very, very good to you so far. Getting out would almost be like insulting an old and generous friend!
Conditions are now ripe for the next stage, stage six — denial. The market has continued to decline, and you are considering getting out of the investment world. This is a dangerous point in your introduction into investing basics, especially if you are getting out for no particular reason except what’s going on in your own head.
Denial leads to fear, which is stage seven. Being scared is only normal, especially when your investments have significantly declined. The key to getting through this investing basics stage is to remain focused and realize that you are investing for the long haul. As the little fish says in Finding Nemo, “Just keep swimming...”
But stage eight is even worse. This is desperation. Having lost the majority of your portfolio — at least on paper — to a market decline, you now have the “all or nothing” mentality. Your emotions are taking over. You should remember why you invested in the first place, because reacting to your emotions will ultimately do more harm than good. But you’re terrified of losing everything! Everything!
Stage nine is panic. You notice that the market is in a wild selling mode. Investors are acting like lemmings. You remember reading about the wisdom of sometimes going against the investment grain — but that was reading, and this is real money!
So you give in. You surrender. This is stage ten: capitulation. After the wholesale selling that you went through, your initial reaction is to slump into a deep depression. Why didn’t you get out sooner? You were a fool!
Stage eleven is despondency. Having lost complete faith in the investment world, you try to figure out where to go from here. You vow never to invest in the market again. What money you have left will go under your mattress. Your financial and emotional downfall takes you further and further down. You keep asking yourself: Why? Why? Why? And the only answer you can come up with is the fact that you fell for a con. All investments are nothing but a scam.
But wait. You look at the newspaper one day, and the stock market seems to be stabilizing a bit. Hope raises its head — and this is stage twelve. Could the market really be coming around? Maybe you should consider getting back in, since everything looks like it’s starting to recover.
Which, by the way, takes you back to stage one — optimism all over again. You’re back where you started. You’re not a billionaire, but maybe you’re on your way to becoming a billionaire thinker, provided you’re able to learn something from the process you’ve just been through.
Do all investors go through that process? Perhaps most do when they’re first starting out and learning investing basics. But not all. Warren Buffett, for example, has been one of the most successful investors of the past 50 years. He started selling Coca-Cola to his friends when he was six years old — and he still owns huge amounts of Coca-Cola stock. Buffett’s method has been to carefully research the fundamentals of individual investments and then hold them throughout the ups and downs that are sure to occur. Is this billionaire thinking? Well, Buffett is certainly a billionaire. From him, you can learn the importance of getting off the emotional roller-coaster ride that investing can become. Or if you do take that ride, you should certainly not let it motivate your buying and selling decisions.
By understanding the stages of investing basics and investor emotions, you’ll have a better chance of getting through them unscathed. Billionaire thinking means resisting the temptation to micro-monitor every tick in the market index. You’ll have a better chance of making a billion, and you might live a lot longer, too.
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