7 Ways on How to Invest Using Psychology-Approved Strategies

Laveta Brigham

Years before the pandemic ruined 2020, the broader thesis for electric vehicle stocks and alternative energy sources began accelerating. With fossil fuels not only being dirty but also exposing us to geopolitical whims, clean energy has wide appeal. But when the novel coronavirus disrupted global supply chains, this narrative took […]

Years before the pandemic ruined 2020, the broader thesis for electric vehicle stocks and alternative energy sources began accelerating. With fossil fuels not only being dirty but also exposing us to geopolitical whims, clean energy has wide appeal. But when the novel coronavirus disrupted global supply chains, this narrative took on greater urgency. Unsurprisingly, many investors sought how to invest in battery stocks due to their leverage on economic electrification.

Typically, most analysts will provide a list of publicly traded companies to consider buying, depending on your tolerance for risk. However, for this write-up, we’re going to focus on utilizing behavioral finance, so that you can develop your own targeted portfolio of battery stocks.

First, some background information. Behavioral finance refers to the processes to better understand how psychology affects market dynamics. Interestingly, the CFA Institute mentions that “behavioral finance differs from traditional finance in that it focuses on how investors and markets behave in practice rather than in theory.”

In other words, traditionalists teach newcomers how to invest by relying on established methodologies, such as analyzing price-earnings (P/E) ratios. However, as you very well know, investors don’t always gauge their acquisitions purely on these methodologies. And that’s especially true for battery stocks, which feature a wide range of risk-reward profiles.

Instead, behavioral finance explores the psychological underpinnings of investment decisions. Though there are multiple factors and nuances involved, this discipline can be broken down into three main components:

  • Individual psychology: This involves personal elements such as experiential bias, where individuals invest based on their memories of recent events that impacted them.
  • Psychology of the masses: Here, we are talking about phenomena such as herd mentality, which may result in dramatic rallies and heart-pounding volatility.
  • Specific market psychology: Each market has its own cadence, and you should be aware of this before proceeding.

Though we’re all humans, different cultures can play a significant role in the sectors of your choosing. For instance, American and Japanese investors tend to have a consistent rhythm in their investing patterns, as determined by daily price movements on an average monthly basis for the S&P 500 and Nikkei 225 indices, respectively.

However, the Germans, based on the methodology described above for the benchmark DAX index, tend to wager in extremes. For whatever reason, Germans love bidding up their market in April and October. It must be the beer!

More importantly, understanding this dynamic can give you a leg up on the competition. Therefore, behavioral finance really ought to be a core educational component on how to invest. Again, knowing ahead of time about these psychological catalysts can help you navigate inherently choppy investment sectors, such as battery stocks.

How to Invest Profitably? Stay Calm

Given the incredibly wild year we’ve had in 2020, it’s hard to stay level-headed. During the peak of this crisis, we saw bankrupt companies like Hertz Global (NYSE:HTZ) shoot up for seemingly no other reason than people simply believed that HTZ was going to move higher. During the “festivities,” many folks threw away everything they learned about how to invest rationally.

Not surprisingly, many were caught off guard with the embattled car rental service. Yes, HTZ shot up from literal penny stock territory to above $5. Now, shares are barely trading above $1 at time of writing. If I’m being honest, I’m almost certain it will fall into the sub-dollar menu soon.

What happened? Unfortunately, some folks will lose their minds, pretending to have some long-lost gift about predicting others’ behaviors. According to Pimco.com, this is what’s known as the overconfidence effect. When others feel the same way, you can get some of the extremes that you saw with irrational investments.

If you want to know how to invest profitably and consistently – especially with volatile battery stocks – you’ve got to control your emotions. Plus, when you see others losing it, that may be a signal to exit the markets.

Stay Rested and Hydrated

It may be hackneyed advice. However, research indicates that “when you’re physically tired or have already made a number of tough decisions, you’re more likely to misperceive risk.” This isn’t just related to behavioral finance. Indeed, whether you’re making a career decision or buying a new car, you want to be rested, relaxed, hydrated and adequately fed.

But this principle should be taught for anyone who’s seeking to learn how to invest successfully. Nowadays, it’s too easy to make rash decisions with your money. Whether it’s online trading platforms like ETrade (NASDAQ:ETFC) or trading apps like Robinhood, modern investors have no shortage of options.

That’s great from a broader integration perspective. But individuals, especially newcomers, can get badly burned. This is part of the disposition bias, which in part refers to the tendency of investors holding onto their losers for far too long under the assumption that shares will at least break even.

However, the reality is that you’re not going to be able to make proper decisions when you’re physically and mentally compromised. Thus, be in the proper framework before tackling the markets.

How to Invest: Playing Off Immediacy Bias

If you can stay disciplined in your investment strategies, you can utilize the powerful phenomenon known as immediacy bias in your favor. According to multiple psychological experiments, “the last trading day(s) of a stock bear a disproportionately (and unduly) high importance on investment behavior…”

Put another way, if the last trading day was positive, you’re more likely to see bullish forecasts for the following day. Conversely, a negative session is likely to set off a pessimistic outlook for tomorrow. This is one of the best psychological factors to advantage for those who are seeking how to invest with greater frequency of success.

As an example, if you’re attempting to buy into an emotional sector like battery stocks, wait until that market prints red ink. According to the experiments, you’re more likely to buy at a discounted price rather than at the top.

Don’t Get Sucked into Familiarity Bias

Although it can seem confidence-inspiring to buy companies or sectors with which you’re familiar, sometimes, it’s best to get out of your comfort zone. That’s according to Pimco, which had these words of wisdom for those who want to know how to invest properly:

Humans tend to stick with what they know, which can have a strong impact on what they buy. However, investing only in stocks that we’re familiar with can result in over allocations to certain companies, industries and countries, which can negatively impact portfolio diversification. One common example is “home country bias,” which is the tendency to favor companies in one’s own country over those from other regions and countries.

Also, familiarity bias can cause us to miss opportunities. For example, Bryan Slusarchuk, CEO of Fosterville South Exploration (OTCMKTS:FSXLF), stated regarding battery stocks, “While cobalt and lithium are often the most talked about metals when the topic of battery powered vehicles comes up, copper is overlooked by many. Copper, however, because of its high conductivity, efficiency and durability is an essential piece of the puzzle when it comes to greening the economy.”

The Behavior Gap in Politics

In the field of behavioral finance, the behavior gap refers to the difference in returns based on investing emotionally as opposed to rationally. For younger people seeking how to invest for the longer term, you should deeply consider this concept.

Currently, it’s incredibly difficult for most folks to think rationally. With a divisive political environment and a heavily contested election around the corner, emotions are at an all-time high. At least some of this toxicity is seeping into the markets today.

But if you can control your mindset, you can leverage the nastiness to your advantage. For instance, Andrew Bowering, founder, director and financial officer of American Lithium (OTCMKTS:LIACF), stated that U.S.-China “relations are going to drive further investment and development in domestic US lithium production, cathode manufacturing and battery production. The US currently produces 2% of its required lithium. As the demand increases, a domestic source is required.”

If you can avoid getting sucked into the precontrived binary narrative of U.S. politics, there’s potentially a lot of money to be made in battery stocks.

Advantaging Herd Behavior

Perhaps one of the most powerful ways on how to invest utilizing behavioral finance is advantaging herd behavior. As we discussed with global market indices, certain cultures tend to invest via different rhythms. For instance, the Germans feature more extremes in their financial behavior than do Americans or Japanese, according to historical data.

But before you dive into specific battery stocks, you should also examine its seasonality, if such data is available. A perfect example is Sociedad Quimica y Minera de Chile (NYSE:SQM). This lithium miner has an extensive history dating back to the early 1990s.

And what does this wealth of data reveal? It turns out that the expression sell in May and go away doesn’t just apply to the stock market, it also has relevance toward SQM stock. With SQM featuring weak trades in May, this is the time to buy as most of the following months tend to produce upside.

How to Invest: Avoid Confirmation Bias and Read Bearish Articles!

When it comes to behavioral finance, you can really tell who’s got their head on straight by their reaction to bearish articles. On the one hand, the smart ones will ponder the information, stacking it up against their reasons for buying a particular stock. On the other hand, the stupid ones … well, you can easily discern who they are!

You see, analysts who write “negative” stories about a company are actually doing the bulls a favor. One of the keys on how to invest successfully is to avoid confirmation bias. Simply by the act of reading materials that are contrary to your own opinion, you are keeping an open mind about your portfolio.

In the worst-case scenario, a bearish analyst can help you see warning signals that you may have missed. That should trigger further research — not angry emails to the editor. If the warnings check out, you’ve avoided making a big mistake. If not, perhaps you may be sitting on a very lucrative opportunity.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

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