Inside the mind of an investor

In the investment world, investor psychology is important and can shape decision-making about how to allocate capital in my opinion.

Let’s take a look at the current market circumstance. Imagine you’re Performance Paul, a fund manager of a $3 billion mutual fund or hedge fund.

You’re evaluated every year on your returns versus an overall market index.

You’ve come to the realization there are only a few stocks which have been beating the broader indexes: tech, tech, and more tech.


Herd Mentality

Being the brilliant strategist, you decide to own them all in your portfolio, even more in percentage terms than these stocks are represented in the Dow Jones Industrial Average or S&P 500 Index.

In the investment business, this is known as piling in. You avoid everything else, including oil, bank and retail stocks that have been underperforming.

Lo and behold, it has worked, and money has flown into your fund. If you are beating the index, you are viewed as a superstar.

Flip Side

Of course, there is always the opposite side of the trade to consider, or as Charlie Munger says: “Invert, always invert.”

What if the technology leaders don’t start to do well? What if the other areas of the market, disparagingly known as value stocks, start to perform suddenly?

Performance Paul can suddenly become Losing Lenny.


In my view, investor psychology comes into play when a fund manager faces a choice between owning what’s working, even though dramatically overpriced, and what’s attractively priced but not yet performing.

In my view, this is what great investors like Bill Ackman and David Einhorn have gotten wrong over the last few years.

Fluid Markets

In my view, it’s worth remembering that the stock market can change, and quickly. Investing fads come and go.

In the 1960s, a popular strategy was to own the so-called Nifty 50, a group of blue chip companies deemed unassailable.

Until that strategy did not work, and those entities were not quite as dominant as once believed.

Investors like Warren Buffett and Munger will never answer a question about what they are buying, preferring to keep it quiet about wherever value might be found.

In my opinion, psychologically, having the fortitude to buy when others steer clear of a stock or sector is not easy, especially when performance does not happen for a while.

Amazon Deal

Amazon (AMZN) paid a $1 billion to buy PillPack, an online pharmacy operating nationwide.

When Walgreens (WBA) reported good earnings but flat traffic, its stock got pummeled on the assumption Amazon will be a serious competitor.

A few months ago, after Amazon bought Whole Foods, the same thing happened to Kroger’s (KR) stock, which has subsequently recovered.

Consider that comparison, and our discussion about investor psychology.

What choice should you make about Walgreens?

Photo Credit: