The psychology of investment and how to remain objective

Rule of 1756 was a British policy enacted during the French and Indian War, which specified that the UK would not trade with neutral countries who also dealt with the enemy.

During the conflict, which became a naval and economic battle, the French were “blocked” by Britain from trading with their colonies.

For a while, the French were subdued out of fear of British naval supremacy. In many ways, the “psychological peak” at the 1,756-point level at the Nairobi Securities Exchange (NSE) represents a block.

Although tested before, twice in April and June this year and once back in 2022, the level has managed to roadblock all bullish attempts. One may say the level represents the climax of negative sentiment.

I’d agree considering the number of risk factors to process these days: GenZ mini-revolution, declining purchasing managers index readings, stubborn inflation, Russia’s war on Ukraine, political disruptions, broke government, fear of another health scare (Mpox), US midterm elections, et cetera.

No one doubts that investment psychology is a delicate thing. While some thrive in adversity, experts say that for many investors, it takes a toll on mental health.

Relatively new fields in psychology and economics have examined investor behaviour, herd mentality, panic, mania and hidden biases that affect decision making often in ways that negatively impact portfolio performance.

Nobel prizes have been awarded to several behavioural finance pioneers in recent decades such as John Schott MD, a portfolio manager, retired psychiatrist and a recognised expert on market psychology.

John is renowned to have coined the term Bear Market Depressive Syndrome (BMDS) with symptoms including sadness, sleep disturbance, decreased concentration, irritability, guilt, discouragement, gastrointestinal problems and/or headaches.

What to do? Psychologists advise that you work out a way to handle your emotions and maintain objectivity. This means that some of us come to the marketplace more emotional than others.

Even if perfect objectivity is an unrealistic goal, we must still take steps to increase our impartiality as much as possible. In short, we should be willing to face problems, understand them, and recognise that they are in some way related to your behaviour.

In addition, beware that fear breeds more fear. The more people around us who are selling in response to bad news, the more believable the story becomes, and the more realistic the situation appears.

As a result, it becomes very difficult to distance ourselves from the beliefs and fears of the crowd, so we also are motivated to sell.

By contrast, if the same breaking news story received less prominence, we would not be drawn into this mass psychological trap and would be less likely to make the wrong decision.

In the long run, the key issue is to minimise your imperfections and maximise your potential, to ride out errors, to keep your emotions under control, and to continually assess the variables of the market.

I’ll add, as they say: “It is darkest just before dawn.” Negative sentiment readings indicate the market is running out of sellers and are thus a bullish signal.

Mr Mwanyasi is MD, Canaan Capital Limited