Transcription
Welcome to Growth Investing Mastery. This video will look at growth investing psychology. As a reminder, this is not investment advice or recommendations to buy stocks. The purpose of this video is to examine the topic of psychology and mental game in growth investing. It's often an ignored or underdisussed topic and conventional wisdom on the topic is wrong. Not working on this area will lead to repeated large investing mistakes. And in this video, we'll examine some of the underdisussed aspects of growth investing psychology. We'll look at common mental game mistakes and strategies to handle the most challenging psychological issues with investing. We'll have insights that come from our own mistakes and insights that come from studying trading psychology books. Additional insights come from talking with fellow investors on the challenges they face.
Let's now talk about the conventional wisdom on investing psychology. And most of the conventional wisdom on investing psychology centers around we should toughen up with no emotion. And recommendations include hardening oneself to investing variance. Sometimes these conventional solutions include renouncing money or gambling to make back losses. And you'll see that on places like Wall Street Bets where somebody has a big loss, they're encouraged to gamble to win it back. However, you will rarely see an investor publicly saying they made a mistake. Likewise, it's rare to see an investor saying they are doubting their strategy or they are fearful. Using this conventional wisdom of toughening up will inevitably lead to common investing mistakes and not working on mental game will lead us to repeated mental game errors. And we may not even be aware of the type of mistake we're making time and time again.
And I have a real life example of the last big mental game mistake I made before I really focused on this area of my investing game. Going back about 6 years, our strategy plans to stay fully invested. But in 2020, the pandemic happens. The headlines get worse and worse, and it seems like a market crash is incoming. Our portfolio is going down each day, and we try and suppress the fear, following the typical conventional wisdom. But eventually, the fear overwhelms us, and we feel massive action is needed to save our portfolio. We cannot stand the losses anymore. And I remember thinking this might be worse than 2008. And some common phrases you might see investors say are, "I had to stop the bleeding or I had to protect my family." Investors will often make the most irrational decision to sound as the only possible choice. And I ended up selling a huge portion of my portfolio and moving to safer stocks and cash. The decision felt great initially as the market went down for one more week, but our confidence in our strategy is completely shot now. My strategy wasn't defined for how I get back into the market as I was planning to stay fully invested. The market started to rally after the Fed lowered interest rates dramatically and I didn't know what to do and later we started beating ourselves up about our decision to sell a lot of stocks. The situation for myself was not sustainable. I was switching from euphoria to despair and back and forth. And I realized something was still missing from my strategy. But I didn't know what it was. And later I came to realize it was mental game strategies which were the key component that was still missing from my strategy. And I learned what the real solution is. It's to remain open and use emotions as signals. They are trying to tell us something. and we need to map our pattern so we know what types of mistakes we're making and try and catch those mistakes earlier on in the process.
Let's now talk about how the stakes keep going up for growth investors. Account balances are generally rising over time for the individual investor. So what seemed like a lot of money 10 to 20 years ago for the investor may feel small now. And as amounts increase, there's a tendency to compare to real world assets. So if we see a big red number on a down day, we might start thinking about what we could have bought with that money. This makes investing quite a lot different than other strategy games such as poker. We can contrast to a poker cash game where we choose the stakes or we can leave the game. So, let's say in poker we're sitting at a table where there's a $500 buy in and we're doing pretty well there. And then we decide let's move to a new table where the buyin is $2,000. But at the new higher stake table, we feel the players are better and we lose a few big hands there. In that case, we can move down in stakes again or we can just decide to take a break from the game altogether. However, in growth investing, there is no way to leave the game without destroying our strategy. And for newer investors, they might be wondering, can't we just cash out before the bare market? One thing to consider for cashing out or selling stocks is that there's tax implications. So, we might be selling at the bottom and still paying capital gains. And one paradox of bare markets is that the value on our companies is a lot better now. Selling at peak fear often leads to selling near the bottom. And we want to direct our focus to the strategy and the stocks rather than trying to constantly read the macro tea leaves. We also want to avoid focus on amounts and what we could have bought or had otherwise. And at some point the investing amounts will become large for the individual investor. The term large varies by individual and what stage of life they're at. But how do we not focus on money when the stakes keep rising? We want to maintain awareness and catch ourselves when we focus too much on dollar amounts of either gains or losses.
Here's a real life example from a few months ago. Our top holding Astera Labs is down over 10% on the day and we're focused on the drop. There's a big red number in our account. We checked the news on Astera and the press releases on their investor relations page, but there's no specific news. It seems like Astera is crashing on general market AI fears. It's good we caught this rise in emotion early and we stopped checking the prices for the day. There was also a recent Astera investor conference around this time from a couple days ago. So, we end up stepping back from checking prices and focus on the tech conference and see what they're saying there. The conference confirms there's no slowdown in their business and Asterisa says they're actually seeing an acceleration despite the concerns. We're able to recover to a more logical mindset now and ultimately our actions with Astera will come down to the results they post. We are looking to avoid making knee-jerk trades by reacting to each noisy headline or reacting to predictions from pundits.
Let's discuss how responsibility keeps going up in growth investing. In our 20s or 30s, our investing amounts are smaller and we're probably investing for ourselves at that point. But as we get into our 40s or 50s, it's much different where we may have a spouse or children to look after. So we end up managing money for others and for ourselves still this can add increased pressure and expectations from ourselves and from the other people who are depending on us. Now it becomes even more critical that we don't make a big mistake with this added responsibility and it's likely we may be harsh to ourselves if we make a big mistake at this point. We can also look at as an investor gets into their 60s and 70s, they may be looking at preserving wealth more and their family still counting on them for that responsibility to manage the investments. Well, this topic of responsibility in investing is similar to how the stakes keep going up. The responsibility generally goes up over time as well. Now the question becomes how do we deal with the increased responsibility so we don't make a big mistake. It's important to build our own guard rails in our strategy because our brokerage is not going to do it. It's also important to recognize rises in emotion. The stronger the emotion, the more important it is to recognize the signal to investigate what's going on. And a big mistake is almost always the result of accumulated emotion. Additionally, not having a well- definfined strategy can mean we alter our strategy at the worst possible time. If our strategy is undocumented, how will we know when we step outside of our strategy? And having a well-defined and simple strategy helps be responsible and stay within guard rails.
Let's talk about how there's no guard rails in investing. One of the authors we really like on trading and investing psychology is Mark Douglas and he says the nature of markets is unlimited. There's an endless number of strategies or actions we could make within our brokerage and your broker will not stop you from making a catastrophic mistake. The broker is unlikely to even check in on you to make sure you're okay. any given day, we can sabotage our portfolio and confidence by taking random actions. This also makes investing a bit different than other financial activities we may engage in. For example, if we're selling real estate or a car, there's plenty of time to second guess or reconsider our decision. So, if we're selling our house, we'd have to call our real estate broker and discuss that we want to put our house on the market. But maybe we sleep on that decision for a day and then tell our broker, "Actually, we're having second thoughts. We want to change that decision." But with stocks, we can make a split-second decision, and with a few clicks of a button, we can do a lot of damage or make a decision we didn't really think through well. So, how do we avoid going in randomly and nuking our account one day? The answer lies in maintaining a sense of balance, which is essential for our strategy. Most growth investors are familiar with the risk of underconfidence or despair. However, overconfidence is often overlooked as a dangerous state of mind. Overconfidence may lead us to take additional risk through leverage, whether that's margin or options. And often times overconfidence coincides with market euphoria. Doing no work on mental game can mean we swing between euphoria and despair constantly. And that's what happened to me in 2020 when I was selling stocks randomly. At first I felt great that I had sold stocks but then I began to regret those decisions. So we need to develop strategies to dissipate emotions that come from investing. In both sides of underconfidence and overconfidence need to be addressed to maintain balance. In scenarios where we are underconfident, we need to be able to dissipate the fear and we need to be extra cautious of overconfidence in a bull market and we need to work to dissipate euphoria and the stakes continually rising with no guardrails means these strategies are essential to our success. The other author I like on the topic of psychology in trading and investing is Jared Tendler. He recommends mapping signals that indicate a rise in emotion. And this leads to stopping mistakes from happening. When we catch the rise in emotion, it's easier to recognize it and realize we need to get back to being more balanced.
Let's talk about a common theme that we hear from other growth investors that there's simply not enough time to do the research. And the rising stakes and responsibility often coincides with having less free time for investing. So in our 20s and 30s, we may have not had the capital to really want to focus on growth investing, but we had a lot of free time. And now as we get into our 40s or 50s, we might have the capital now, but we don't have the time to do the research properly. And this age of 40s or 50s may coincide when we're at the peak of our career or we have a busy family life. I also struggled myself with knowing what investing activities are even important to focus on. So I knew I wanted to take investing more seriously, but I didn't know what I was supposed to be doing. And with a limited amount of time, we need to make sure our investing activities are focused on high-V value activities that improve results. One of the highest valued uses of our time is to review a earnings transcript. And reviewing a stock we own is more valuable than reviewing one we're researching. That's because we already have money on the line, so the decision is a bit more important. Although, we still need to make time to learn about new companies in our strategy. Many investors get bogged down in activities that seem high value, but they actually aren't. And some of these examples may include watching CNBC, reading general news, analyzing Fed actions, or politics. Let's talk about borderline activities or research that's more debatable on its value. Let's say we're Nvidia shareholder and we're watching Jensen's GTC speech. We consider this to be of medium value. The speech is 2 hours long, but it provides a good view of the vision of the company. We want to keep in mind that 2 hours is a good chunk of our time for our cognitive capacity. In 2 hours, we could potentially have reviewed two earnings transcripts as a trade-off for our time. And we also want to be aware if we're a passive watcher or taking notes. Are we just entertaining ourselves or is this really high value for our investment strategy? And if we're going to spend 2 hours and consider that part of our investing time, we need to make sure there's enough new information to investors to make that two hours justified. And where I draw the line on this topic of value for research is that watching Jensen speech is of value. However, we want to avoid watching the full conference of GTC. There's maybe 30 speakers of different companies and profiles, but we certainly don't want to spend 30 hours getting lost in the minutia of each speech. And we call this getting caught in the product rabbit hole. As we get more serious as an investor, we may want to double down on the amount of research we're doing, but we really want to make sure those are high-V value tasks we're focused on. And we may also draw a line if we're actually Nvidia or AI enthusiast. If you really love AI and you're interested to learn more, then it might be fine to look at all those videos as entertainment, but just make sure you don't mix it up with time spent as an investor.
Continuing on with the topic of limited time, let's talk about how we schedule with a limited amount of time. Assuming we have only a few hours per week for investing, we really need to make that time count and we want to focus on highvalued tasks over more passive low value ones. And here's an example schedule with only 5 hours per week of time. On Monday, we review and underline a earnings transcript for a company we own. On Tuesday, we research and review a earnings transcript for a new company we heard about from a fellow investor. On Wednesday, our time is spent focusing on strategy, possibly reading a relevant book or studying some strategy for growth investing. On Thursday, we read and underlying the transcript for a tech conference on a company we own. We take off on Friday and then on Saturday we work with our stock screener to find some new ticker symbols that might be interesting. Our aim here is to create some small time commitment that we can easily handle. And we need to make sure we do not overwhelm ourselves. We need a sustainable approach. We also may need to become more creative with our time allocation. For example, let's say we're waiting for our kids dentist appointment. Rather than just checking our phone during that appointment, we can bring our earnings transcript and a pen to review it while we're waiting. The main conclusion here is that our time is valuable. So, we want to make sure we use our time on high value investing tasks.
Let's now talk about how investing is treacherous. We have discussed four factors which add pressure to our growth investing strategy. The first is that the stakes keep going up. The second is responsibility keeps going up. The third is that there's no guard rails from our brokerage. And the fourth is that we may be time constrained and not have enough time. When we started investing, it may have been fun. The consequences of our actions were much lower when we started investing. And once we have built up some wealth, we want to take it more seriously. Our knowledge of investing has increased over the years. This increased knowledge makes it seem like we should not be making mistakes anymore. So, we might say to ourselves something like, "I know better than this." Or, "What the heck was I thinking?" And it's easy to fall into the trap of berating oneself for past mistakes. Mistakes can compound easily as we try and correct a prior mistake.
Let's look at a real life example where we made some mistakes. We own the company Bio Stem and they're set to report earnings soon, but on the day of their earnings they delay and they say it's because they're uplisting to the NASDAQ soon. We made a immediate knee-jerk reaction to sell but then decided we want back in. I ended up trading in and out as our opinion thrashed. Our internal dialogue became really negative. For example, I was saying something to myself like, "You idiot. You didn't even write down the trades like you were supposed to." And writing down the trades is one of my small guard rails I have. This helps me prevent from going in and making random actions in the account. But I didn't even follow this basic part of my process and I started getting mad at myself for making these beginner mistakes. Additionally, we consumed a huge amount of cognitive energy for what was just a 2% position going back and forth on this stock. I didn't catch my emotional reactions early in this scenario. Then I tried to overcorrect previous trades.
Let's now talk about what the solution is to many of these psychological issues. And that is that emotion equals the signal. And this is a concept borrowed from the mental game of trading by Jared Tendler. What he says there is emotion is never the flaw. Emotion is the signal. A common investing fallacy is that emotion itself is the problem. So we may view it as a flaw to be fearful. Here's an example scenario which is common. Our portfolio is going down day after day. The first few days we seem to have no problem. We've handled bigger downswings before. But into the second week of the downswing, the dramatic drop in our portfolio has us worried now. We end up making a basic execution error by buying 100 shares of a company instead of 50. We didn't calculate the number of shares correctly. And this was because the accumulated fear makes it so our logic is not as strong. And these types of errors become more commonplace in this state. This state of mind can easily lead to negative selft talk as well. It almost seems incomprehensible that we made such a basic mistake. The solution here is to track the rise in emotion earlier. We did not process and dissipate any of the fear. So it just built up until a basic mistake was made. We don't want this basic mistake to cascade into a larger series of errors. We need to map our pattern and journaling what caused a rise in emotion can be helpful. It could be as simple as realizing that if our portfolio goes down by over 10%, it automatically causes fear for us. Events from years ago, like the draw down in 2022, can be brought back to life. And this is especially common if we did not do any of the work to dissipate the emotion from 2022 or other draw downs. Not working on mental game may lead us to putting our head in the sand and just hoping for the best. One common strategy we discovered from Jared Templer is injecting logic. And this can be as simple as making a statement about our strategy. For example, we could repeat something like, "We know our strategy underperforms in bare markets." So, we shouldn't be surprised if the market is going down and we're underperforming versus the market in that time frame. It may sound obvious, but awareness of this part of our strategy in that we underperform in bare markets will help us handle down swings a lot better.
Let's now talk about a common psychological issue that most growth investors will face at some point. This issue is hyperfocus on one company. And as an investor gets more serious, they will naturally want to understand their companies better. This can lead to excessive research and hyperfocusing on one company. We discussed a previous scenario where we had a 2% position in a company called Biom and it ate up a huge portion of our cognitive capacity and it may be hard to accept contradictory information. The accelerating financials look incredible, but some aspect of the stock's narrative bothers us. And the amount of time we spent researching and then going back and forth did not equate to our allocation size. This scenario of an investor hyperfocusing on a company can also happen when we're an enthusiast for the company's product. If we're actually using the product and really like it, it may be hard to part ways with the stock if we need to sell it. And we're essentially overinvesting our cognitive capacity versus the allocation or investment stake that we have in the company. This also means when we hyperfocus, another company in our portfolio is neglected because we weren't focused on that company. Some key takeaways are that all else being equal, if we had 10 stocks at 10% each, we would dedicate equal time to each stock. A common question that may come up here is, what about ramping up on a new company? Doesn't that require extra time? And we do want to get up to a comfortable level of knowledge first on a new company, which does mean adding some extra time in our process for this. But then once we're ramped up on a new company, we want our cognitive capacity to roughly be aligned with our allocation. This means that a 20% allocation company should be focused on more than a 5% company. and a 5% allocation company should be tracked closer than a 1% allocation company.
Let's talk about a common psychological issue now which can impact new investors and experienced investors. This issue is overreacting to news. And as we gain experience investing, the stakes and the responsibility goes up. As we discussed earlier, this usually means we start to track our companies closer and more diligently. A common mistake is to overfollow the company. Another common mistake is to assume the smart money in quotes know something. It's important to keep in mind that stocks in emerging sectors and industries will react stronger to news. And part of the reason is the newer sector is less understood by market participants. This often creates panic and euphoria cycles within a specific stock. And again, Astera Labs will make a really good example for this point. Astera Labs is a company which has gone through three different panic and euphoria cycles since IPO. Initially, the stock lost over 50% of its value after the IPO when it went from $80 a share down to $35 a share. But optimism from the market for AI stocks comes shooting back and the stock goes all the way up to $145. After this runup, deepseek and tear fears push the stock all the way back down to $55. And yet again, another hype cycle comes going up to $250, but then coming back down to a more reasonable $150 per share. And these wild swings all happen in a period of less than 2 years. In this scenario, we want to be cautious about overreacting to news and getting caught up in the market panic. The solution here is to let the actual results dictate our primary actions. So, we might be adding and trimming along the way trying to take advantage of different price points, but we don't want to overreact to a potentially clickbait article and sell our stock based off that. It is worth following the company news and press releases. And part of my process before I do my monthly summaries is to check the news and press release page of each stock I own to see if there's something I missed. And we definitely want to be cautious about overreacting to the news, even if it comes from the company itself. But sometimes a company will do something like pre-announce earnings and it's a lot worse than we thought. So we might sell in a scenario like that. We can catch if we're overreacting to news by speaking in all or nothing scenarios. So, we might say the company's about to take over the whole market or the company's about to lose all of its market share. But usually results for a business are not this black or white. And if a company really is losing share in the marketplace, it will definitely show up in the results. A key takeaway here is that second-guessing ourselves over headlines will kill our confidence. This is especially true if we fall for clickbait and then later realize we fell for a story that wasn't even real.
Let's now talk about a fascinating psychological phenomena, which is that losses hurt more than gains. There's actual formal theory called loss aversion theory that states that losses hurt more than gains. And estimates range from 2x to 3x for how much a loss impacts versus a gain gives us a benefit. One thing we've learned over the years with talking with other investors is some say the earning season is stressful, especially when some of the companies have big losses. Here's an example scenario. We hold 10 stocks. Five of them outperform at earnings. Two have average reports and three underperform. And for this exercise, we'll assume that each overperformance gives us plus one of positive energy. The underperformance counts as -3. And if we get an average report, it's zero. So from those five stocks we held that had an overperformance, we get five points. But we get -9 points from the negative reports or the three reports that underperformed. And our net emotional balance at the end is -4. And we're left with a negative feeling from the earning season even though our portfolio is up. This actually happened to me recently where we went through a pretty tough earning season. It felt like my portfolio should have been down a lot, but when I actually tabulated the results, the portfolio was up a little bit. Some key takeaways from this is we should use that strategy of injecting logic. Our portfolio is up after the earning season. This is a positive overall result. And in a case like this, it can help to recalculate our year-to-ate returns to confirm it. We also want to be conscious and aware that we will remember the losses more. For example, the Transmetics earning report from over a year ago still sticks out in my memory. Having a top confidence stock drop 40% on a negative report adds a huge deficit of negative energy. But on the flip side, these clear underperformers allow us to get away from stocks that are no longer doing well.
Let's now discuss a common scenario in investing where the stock is down, but the business is thriving. It can be hard for newer investors to accept that a stock can go down, but the business is doing well. Likewise, a stock can be going up with the business losing market share or the business underperforming. It can be easy to get the stock price confused with the health of the business. So we want to have a clear distinction in our mind between the stock price and what the actual business is doing. This mindset that the stock price equals business momentum often corresponds to assuming the market is the smart money. And it could be worth examining if we have some predetermined negative beliefs about Wall Street or money. There's also an interesting paradox here. that the stock going down actually makes us want to sell and the stock price going up inclines us to want to buy more or wish we had more shares. If we're getting those types of sentiments often, it's usually because emotion is overriding our logic sometimes in these scenarios. The stock price going up makes us feel good, so we're in a buying in a positive mood. But the stock price going down might make us fearful, especially if we're a beginning investor and we don't know what to expect. There's often a question if we should get out because it seems like everybody else is getting out. Yet, logically, we know if we want to have a good return, we need to buy low and sell high, as they say. We want to keep in mind that lower prices present a more attractive valuation, while higher prices typically have worse values. The logical side of us tells us to buy a stock when it's down, but it's hard to do if we have a lot of negative emotion. Our logic should tell us to sell when prices get too high, but we may be full of overconfidence at that point. The solution for handling these types of scenarios is also to use emotion as a signal. Staying balanced in our perspective allows us to use logic most of the time and our logical side should also tell us that the stock price does not equal the business prospects.
Let's now talk about how big winners carry the day for our portfolio. Our portfolio returns for growth investing mastery are largely driven by getting big returns on individual companies. The maximum that a single company can lose for us is 100% of that money, but the potential gain in theory is unlimited. In practice, we will never lose 100% on a stock, but big disappointments might lose 50% or even more. Here are some examples of the outsized gains on individual stocks we've had over the past few years. We had the company Super Micro 12x in 9 months. Additionally, we had the company Szle 5x in 6 months and the company HIMS 4xed in about 1 year. But there's also a tricky psychological phenomena here that's similar to earning season. We remember the losses more. If you're familiar with the company Super Micro, they had some accounting issues and they delayed a filing. And Super Micro's eventual drop from accounting issues creates a big impression in our mind. And it makes us remember Super Micro in a negative light even though Super Micro drove enormous gains for our portfolio when it was going up. Additionally, a company like Sle 5xing in 6 months has faded from memory now. Yet, Sle helped drive our 2025 results dramatically. But Sle was never a company we were really that attached to. Sle dropped from our portfolio when they had a disappointing earnings report. They gave us a clear signal to sell on that report and there wasn't much to overthink there. And one important aspect with this concept of big winners carry the day is the winners gaining over 100% will cancel out many losers. Here's an example with just two stocks to show how this concept works. In this scenario, our portfolio has just two companies. And in this example, we have $10,000 in Transmetics. It goes down 50%. and it's now worth $5,000 for the shares that we own. In the company sle in the example, we put in $10,000 and it goes to $50,000 or 5x's. And assuming these were just our two positions, our $20,000 portfolio went up to $55,000. A very good result. Yet, the memory of transmetics dropping is stronger and stands out more because of loss aversion theory. Some key takeaways here are that big winners allow us to be wrong a lot. One big winner allows us to select incorrectly on other stocks, but still drive incredible returns. We can think of this as similar to a slugging percentage versus a batting average in baseball. Our strategy looks for home runs, but we're also likely to strike out a lot more. We're looking for stocks which can 3 to 4x over the next 1 to two years. And we can think of that as hitting a triple or a home run in baseball.
Let's now look at some concluding thoughts on growth investing psychology. Growth investing psychology and mental game is essential to our strategy. And growth investing is more treacherous than it initially looks. It's easy to be confident at the base of the mountain when we're just getting started, but not as we approach the top. Pitfalls can include the stakes going up, responsibility increasing, and the lack of guard rails. And we need comprehensive mental game strategies to deal with any scenario that can come up. We need to recognize early when emotion is on the rise and what it is signaling to us. And we also need to look to dissipate emotion earlier in the process so it does not accumulate. The time spent mapping our patterns will lead to a mostly stress-free investing style. We can avoid the wild swings between despair and euphoria. And our mindset becomes more balanced over time as we learn to roll with the punches better. We like the phrase zen mind, beginner mind to describe our ideal state. We're balanced and open, waiting to receive information. If you're looking for additional reading on this topic of growth investing psychology, there's three books I would recommend for serious growth investors. Many of my ideas on this topic are based on things I learned from these three books. The three books are The Mental Game of Trading by Jared Tendler, Trading in the Zone by Mark Douglas, and The Disciplined Trader also by Mark Douglas. You may have noticed that the word trading is in each of these titles and most of the serious takes about psychology regarding stocks comes from the trading world. There is more pressure in the trading world, but we can carry over the lessons from these books and apply them to more longerterm investing.
This concludes the video on growth investing psychology. I'd definitely be interested to hear your feedback. And as a last reminder, this is not investment advice or recommendations to buy any stocks. Thank you for listening.