The psychology of investing – learning from your mistakes | Nordea

Confessions of an investor | Femme x Nordea Salkunhaltijat 3

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Nordea's portfolio manager Marie Karlsson is a guest on Inderes' Marianne programme, discussing investment psychology and why investing is much more than just numbers or market timing. The conversation delves into how losses affect decisions, how impulses can guide actions, and why sticking to the plan is most difficult precisely during uncertain moments.

Hits and misses are part of the journey

The first investment decisions make almost everyone feel nervous, even when the sums are small and the risks limited. That’s perfectly normal. Beginners often end up choosing shares for their portfolio because the company name is familiar, the idea feels right or the investment simply “sounded sensible” at the time. That, too, is part of the journey.

Once you have got started, monitoring share price movements soon becomes a habit. You may make decisions based on how you feel at a given moment. In the beginning, it’s easy to imagine that you succeeded thanks to your competence even though sheer luck also played a role. Mistakes, on the other hand, feel heavier, but they are an essential part of learning.

A budding investor can make many miscalculations:

You buy when share prices fall but don’t fully understand the reasons behind it.
You switch between investments too hastily.
You invest into something you don’t quite understand.

Fortunately, budding investors usually invest small sums. Therefore the cost of learning is smaller too, but extremely valuable for your future success. The sooner you start, the more time you have to learn from your mistakes and grow as an investor.

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The biggest risk in investing is the investor themselves

Investing always involves multiple risks, and surprisingly enough, one of them is the investor themselves. Very few investors make fully rational decisions. Their experiences, emotions and mindset always influence their buying and selling decisions.

Overconfidence is one of the most common pitfalls
A few successful investments can make you feel that you understand the market better than most people, and therefore the risks you take increase without you noticing it. At the other extreme, insecurity can lead to not having a view of your own, so your decisions are based on other people’s actions.
Herd behaviour comes naturally to humans
When others get excited, we get excited too. When markets start to fall and headlines turn grim, fear spreads fast. Therefore share prices often fluctuate more than the actual value of the companies. In this kind of situations, your long-term approach is put to test.
Stick to the plan
When the market rises, it may seem easy to stick to the plan – you buy quality companies and let time work for you. Challenges emerge when the market begins to fall. Suddenly a long-term investment doesn’t seem that long anymore. You may be tempted to sell profitable investments in order to collect your returns, while at the same time you continue to hold on toyour loss-making investments hoping for a turnaround.

There is a risk of making the classic mistake of cutting the flowers and watering the weeds. You may divest your winning investments before they get a chance to grow properly and keep your weak investments in your portfolio too long.

History shows that market dips are unavoidable. For example, the share price of Warren Buffett’s Berkshire Hathaway has fallen by more than 40% several times over the course of its history, but the company has performed exceptionally well despite that.

For you as an investor this means that you have to be able to resist your initial reaction. Be fearful when others are greedy, and be greedy when others are fearful.

If your emotions take over, recognise the warning signs

Have you ever bought shares because “everyone else is buying them”? Or panicked and sold your shares due to gloomy news? You are in good company. All of us have done that sometimes.

Typical warning signs can be:

FOMO or the fear of missing out. You read on social media about “the next gold mine” or how someone has gained quick wins. Suddenly you want to jump in without a proper plan.
Panic selling. The news flow turns negative and the markets dive. Your head says “hold”, but your heart screams “sell”. As a result, you may sell cheap and regret it later.
“Grabbing the falling knife”. You buy more shares when the price is falling only because they seem to be cheap. Consequently, your losses may grow when your holdings grow.

Learn to recognise these moments, as they can help you grow as an investor. One question can often stop you from making mistakes: Is my decision based on knowledge or emotions?

How to avoid expensive mistakes when you get too excited

One of the most dangerous moments in investing is when everything seems easy. When a share or sector begins to attract a lot of attention, expectations increase quickly and prices often go up faster than the company’s or sector’s performance. Eventually, the valuation can become disconnected from reality.

The market conditions seen in 2021 are a good example of this. The valuations of many companies became increasingly inflated when investor interest surged. Even several quality companies reached valuation levels that left very little room for disappointment. When expectations later subsided, share prices fell dramatically. Thus, a quality company is not automatically a good investment at any price.

Investor interest often rises only when the share price has been going up for some time. This is evident especially when investment decisions are made without proper understanding. You buy shares in a company, but don’t know how its earnings are generated. You trust the key figures without understanding their background. Or you invest in complex products, such as leveraged instruments, but don’t understand their logic.

How can you avoid these pitfalls? Ask yourself three questions when making an investment decision:

Do I understand what I’m investing in?
Is my decision based on my own analysis or an analysis made by someone I consider reliable – or is it based on other investors’ excitement?
Does the price make sense in relation to the company’s actual value?

If you can’t answer these questions, you should stop and think. The best investment decisions are rarely made in a rush.

Mistakes are part of the journey

Every investor experiences setbacks at some point along their investment journey. Mistakes are an inevitable part of investing and they do not mean that investing isn’t for you. Both successes and failures are important, as the most successful investors learn from both.

You may have found yourself in a situation where everything seems obvious afterwards. In reality, all decisions are made based on current knowledge, and it’s impossible to know the outcome in advance. That’s why mistakes are valuable: they force you to take a critical look at your mindset.

However, not all mistakes are equal. Some of them can be put down to poor analysis, some to emotions and some to pure bad luck. If you want to grow as an investor, the most important thing is to learn the difference between these.

Many people don’t want to start investing because they are afraid of mistakes. Yet there will never be a moment when you have “enough” information. You can learn something valuable as an investor from every mistake, so don’t let perfectionism stop you from starting or continuing to invest.

Remember that all experienced investors have started as beginners. They have made mistakes, learned from them and kept going. You can do that too. Start small, learn more all the time and give yourself permission to make mistakes, as they will make you a better investor.

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