Many people are now trying to buy stocks for the first time. The question is whether they should rather leave the job to the professionals or do it themselves?
Lately, people and especially gamers have made good money on stocks. Recently, many beginners earned a lot on the GameStop share. In the last year, some have earned more on stocks than on their jobs. Does this mean that most people should try to buy stocks in the marketplace? Is it best to trade stocks on your own or get help from a financial advisor?
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Financial services companies like Goldman Sachs and Lloyds have many advantages that give better decisions than individual investors. They hire the brightest minds, have managers with long experience from many investments, gather large amounts of facts about the entire stock market, make thorough analyzes of companies' management and opportunities, and use technological tools and artificial intelligence to make outstanding investment decisions. Experts usually have a more nuanced and detailed understanding of reality than beginners. They have seen many different patterns in the stock market and can quickly place a new stock in an experienced pattern.
However, recent examples show that finance companies charge high fees that “eat up” our profits. Some of them have even deceived us into making wrong decisions or thought mostly of their own profits. Perhaps this has weakened the trust we have to financial service providers that we want to invest for ourselves. New internet solutions make it easy and affordable to trade stocks on your own, even dogs can trade nowadays.
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Investments are uncertain decisions because no one knows what the future holds. When the brain does not know what will happen, it creates perceptions and emotions that cause reality to be misjudged. We do a lot of mistakes because we are relying to much on our own beliefs and misjudging what reality looks like. Everyone who invests creates mental notions about how the price will be able to develop, and what will affect the price. However, if the situation develops differently, both experienced and beginners will be wrong. No one knew that the GameStop bubble would end up with so many beginners earning so much more than the professional investors.
Regardless of expertise, optimistic emotions can increase risk appetite, while negative emotions make investors more cautious. Anger can trigger bad choices. Those who have already bought a falling stock take more chances than those who want to secure a profit. The goal of making money leads to beginners waiting too long to sell of a falling stock. They are waiting and waiting for the stock to go up again, even though it is falling, and they are losing more and more money. Others adjust to the loss, but sell as soon as it starts to rise, and misses out on most of the gain unfortunately.
Beginners may think too narrowly. They focus on few stocks, but professional firms have many investments in different markets with both short- and long-term horizons. Many of those who spent money on GameStop only invest in this stock, while the professional players have many alternatives.
Regardless of experience, people are influenced by subjective advice. It sounds better that a stock has a 30% chance of success, than that it has a 70% chance of failure. The brain is also not so good at assessing uncertainty and risk. One of the most well-known decision traps is the Herd behavior. Investors follow the flow and buy and sell in line with each other so that pumps and dips are created by many people buying and selling at the same time. Many beginners feel carried away by the excitement of the stock market, especially when prices change quickly and unexpectedly. It can lead to hectic and impulsive decisions that are not so bright. The advantage for professional investors is that they have plans for how to act in unexpected situations. The plans are made while “the head is cold”, and in collaboration between several different experts in the same company. By the latter portfolios often tend to perform better in the long run.
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To round off this topic, we can ask ourselves the question: Does it pay of to feel like a skilled investor? One of the biggest investment failures in the stock market is high self-esteem. Bright and skilled people feel less doubt, think less, and are less self-critical than insecure beginners. People with high confident think more narrowly about what can happen, they are convinced that they know why things happen, and think they will master all kinds of surprises. A Humble beginner’s mentality on the other hand can be more profitable for all kinds of investors.
I hope my thoughts for the evening creates some new insight for you folks!
Have a lovely HIVE evening!
Cheers
-Olebulls