Investor Psychology

Supply and demand, like compounding, is another basic concept you should understand to be a successful investor. As supply decreases and/or demand increases, prices usually go up. As supply increases and/or demand decreases, prices usually go down. This is true for most things for sale including stocks and bonds. Investor behavior based on FEAR, GREED and HOPE is a major contributor to permanent losses.

Fear may be the biggest problem for investors. It can cause buying at high prices when chasing a stock (fear of missing a rally or what others are in) or selling at the wrong time because of events that may have nothing to do with the stock.

Greed is more of a problem with selling at the wrong time waiting to get a higher price.

Hope usually is felt holding a stock for more profits or less loss. Both can hurt your compounding efforts.

Investors need to learn to control their fear and greed levels to take advantage of the opportunities presented when others panic because of fear and greed. Buy when others panic; sell when others are greedy and hopeful.