Think Like the Great Investors: Make Better Decisions and Raise Your Investing to a New Level

Chapter 4

Mine, all mine (mental accounting)

I was once asked to explain the most important things that drive investment success, but my questioner added that he did not want to hear about controlling his emotions. From the qualifier in his question, everyone will instantly recognise that my interlocutor was in denial about the need to work on this aspect of his investing activity. Indeed, it is easy to see that this investor was in the second of the three stages investors go through in becoming proficient. I learned these three stages from market wizard and trading coach Van K. Tharp. His take on them focuses strongly on the idea that the path to investment and trading success lies within us.

In the first stage beginners look for tips — what to buy and when to buy and sell. They are looking for a guru who will tell them what to do. They are seeking the solution to the investment problem outside themselves. What they need to do is progress to the point where they realise that the questions they are asking are trivial and that they are more likely to succeed as investors if they learn to make their own decisions.

In the second stage neophyte investors come to realise the need to learn to make their own decisions. This is when they begin their search for the perfect system. Most of this search revolves around finding the method that will enable perfect decisions on which stock to ...