Stock Market Mindset

As defined by Webster, 'mindset' is: a particular way of thinking; a person's attitude or set of opinions about something.

Your mindset towards the stock market may lead to certain behaviours, regardless of whether you are aware or not. And it is through these behaviours that I'm able to dissect the differences in mindset.

Types of mindset in the stock market

My definitions on the different types of mindset in the stock market stem from the sum of my experiences as a trading representative where I encountered investors from all walks of life. 200 to be exact.

For a start, you may wish to take reference from my experience but as your experience accumulates, you'll be in a much better position to redefine the definitions for yourself.

The Beginner Mindset

The typical beginner I've encountered over the years as a trading representative wants to invest in one stock that pays high dividend and also has the potential for astronomical growth in capital invested.

Nothing is impossible in the stock market given time and it is this possibility that attracts most of us to the stock market in the first place. Although we know the odds of that happening is extremely low, we tell ourselves it may happen for us as long as we put in the legwork.  Proof ? Just look at the queue outside Singapore pools (lottery) outlets on Saturdays.

What usually happen to typical beginners are determined by their initial encounters with the stock market. Depending on the initial profit or losses experienced, the beginners will fall into 2 main categories.

Those with initial losses may have thoughts similar to this: 'What others say about the stock market is true, it's just like a casino'. Most beginners with initial losses never return to the markets.

On the other hand, those with initial successes may have thoughts similar to this: This is easy money, how long have I been missing out? I wish I knew about the stock market earlier!

The Disaster Mindset

With the initial successes and the 'I am born for this!' mentality, real effort may be put in by the typical beginner to solve the stock market puzzle.

They may start to read research reports, ask questions on stock forums, attend investment seminars, learn fundamental analysis, learn technical analysis, read the business times, buy investment books and/or subscribe to automated trading software, etc.

No beginner comes to the stock market with the intention to become a gambler. But by putting in the 'real effort' described above, this is the time when the typical beginner becomes a gambler, unknowingly of course.

How? The typical beginner starts to think he's a trader/investor and doesn't realise he is gambling.

Why? Because if one can have initial success in the stock market with half-baked effort, surely their gains will multiply if 100% effort is put into the analysis.

Imagine all the hard work and research the beginner has done, and the newly gained confidence that the stock market can be easily conquered based on their initial success, they is no way their analysis can be wrong.

Alas, they commit the common mistakes when one analysis that didn't go their way, wipe out their profit made from previous investments and then some. 

Beginners with the disaster mindset may suffer such big losses, both financial and emotionally, that some may never return to the stock market and join those in the 'beginner with initial losses' category.

Some unintentional gamblers who recover from the financial setback and bruised ego, somehow realise they have been gambling all along, may advance to the trader and/or investor mindset.

The Trader Mindset

Under my definition of a trader, it means anyone who buy or sell stocks for capital gains, regardless of the types of analysis used.

Traders put in 100% effort just like the gamblers but what differentiates them from the gamblers is that they are very well aware no analysis is foolproof and they will be wrong sometimes and hence have strategies in place to limit their losses when they are wrong.

They think in terms of probability such that they will have both wins and losses but as long as their average win per trade is more than the average loss, they will be profitable despite the small losses they have to take. 

The know they have no control over what the stocks market does, despite putting 100% effort in their analysis. The only thing they can control is the risk they take, which is decided before they execute their analysis.

They understand that market movements are largely random and there are only certain pockets of opportunity that they can exploit on a consistent basis. And it's based on this consistent approach to the stock market that gives them an edge.

Not all resurrected gamblers will end up with the traders mindset. Some may choose to have an investor mindset.

The Investor Mindset

Under my definition, investors exchange capital for cash flow i.e. buy income-producing assets. For example, an investor buys $100,000 worth of dividend stocks that pays 6% per annum, meaning they will receive $6,000 worth of dividend income per year.

Ideally, the investor would look at their investment in dividend stocks as a onetime purchase for an asset that'll provide them with income for as long as they own the stocks and are not concern about the fluctuation in the capital invested.

But in reality, the market value of assets fluctuate and sometimes in favour of the investor, tempting them to sell for capital gains. Under my definition, investors do not sell for capital gains. Anyone selling for capital gains fall under the trader mindset.

Therein lies another form of disaster mindset: A trader who thinks he is an investor i.e. sell for small capital gain but holding on to the small  losses. Over time, this group tends to become 'traders turned involuntary investors' when the small losses become 'too big' to cut!

The only 2 circumstances that an investor should sell is that there is a compulsory takeover or there's a fundamental change in the company such that the company is no longer able to pay a fair dividend to its shareholders.

Your mindset. My mindset

If you are new to the stock market, your mindset should be to recognise the beginner mindset, get past the disaster mindset, then settle into the trader and/or the investor mindsets.

Again, this is just one person’s opinion. You’ll have to make a judgement for yourself when you have more experience in the stock market.

As you go through the rest of the materials on my website, you may realise that I'm more geared towards the trader mindset, after having gone through the beginner and disaster mindsets myself.

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