S2P Market Signal - Investing Psychology

Investing Psychology

Studying the market will help you become a better trader or investor, but success is unlikely unless you also study yourself -- your reactions, thought patterns and presuppositions. It is particularly important to understand how fear and greed, the primary psychological forces in the market, operate in your character.

Everyone has strengths and weaknesses. It is essential to know yours well in order maximize the former and minimize the latter.

Much helpful material has been written on trader psychology. Yet the material we have seen hasn't dealt with fundamental differences in temperament, instinct, and various way of 'stacking' the use of the mind, will, and emotions that form every individual's character.

For years we have been students of personality theory, beginning with the MBTI (Myers-Briggs Type Indicator) as popularized by Kiersey and Bates in "Please Understand Me". Donald Pirl began studying the nine enneagram personality types over ten years ago and is currently enrolled in an enneagram professional certification program.

Although knowing yourself in terms of the the MBTI is extremely helpful, we have found that knowing our enneagram point and understanding enneagram based personal growth dynamics greatly increases awareness of our inner motivations as well as our natural strengths and inherent weaknesses. To our knowledge, this growing body of psychological material has not yet been applied specifically to trading and investing. Below is our initial sketch of the Enneagram of Investing and Trading.

The Enneagram of Investing and Trading
Please note that there are many different names used to refer to the same enneagram type number. To discover your type or to learn more about the enneagram you can do the following.

Take a tour of the nine types (with videos!) at Enneagram Worldwide. (Clicking on the type name hyperlink in the middle column will also launch the Enneagram Worldwide video for that type. You may need to download and install a free QuickTime player for either Mac or Windows.)
Go to our sister site AncientPathsPersonalGrowth and take the free 36 question RHETI Sampler Enneagram test made available by the Riso-Hudson Enneagram Institute. (Clicking on any of the pictures below will also take you there.)
Take the Essential Enneagram Test online for $10
Learn to recognize enneagram types in movies and videos

We agree with the vast majority of enneagram teachers who state that one's type remains the same throughout life. However as individuals become more whole or integrated, their type 'fixation' is usually less noticeable to others and they are free to use a wider range of life strategies.

The Will, Body or "Gut" Types (Beware of Anger)

	Eight: "The Boss" -- Its all about strength, power and domination. Hard outside and soft inside, Eights do not like to appear vulnerable. Eights have a need to be against, and more than others need to learn that "the market is always right." Eights go to Five in stress and can do excellent analysis there. However, in the moment, their naturally decisive will tends to override "the plan".
	Nine: "The Mediator" -- Unlike Eights, decisions are often difficult for Nines since they naturally tend to see all viewpoints which is their strength. Mediators want to keep their options open and may find it harder than others to find their own investing style or to commit to trades that go against them even within the expected draw down.
	One: "The Perfectionist" -- Ones are decisive, disciplined and focused, but may need to learn that successful trading is more than the disciplined application of a system. It can be hard for Perfectionists to see "out of the box" and they may become very frustrated if their chosen system is not working due either to flaws in the system or market factors beyond their control.

The Affective Types (Beware of Self Deceit)

	Two: "The Giver" -- With a life strategy of helping others and an orientation towards developing relationships, Twos are probably less likely than other types to be in the market, which is usually viewed as a solo game. Givers may function quite well as members of an investment club or as a partner in an investment team.
	Three: "The Performer" -- Threes are usually quite adept at portraying a successful image and may need to learn the hard way that the market is quite unforgiving to the strategy of "fake it until you make it". Yet with an unmatched drive to succeed, Performers are the "workaholics" of the enneagram and will not find it difficult to discard theory that doesn't produce results.
	Four: "The Individualist" -- Fours live for inspiration and have a very deep desire to be true to themselves. Fours are unlikely to blindly follow some one else's trading system, but can build one of their own. Even with their own unique plan, the Individualist's emotional impulse can override. However, hunches are a Four's gifting and they ignore them to their own hurt.

The Cognitive Types (Beware of Fear and Greed)

	Five: "The Observer" -- Fives are natural researchers and system builders but may need to design in flexibility to avoid either trading with a broken system or redesigning their system during a high draw down period. Observers may overemphasize theory to the detriment of application and may find their internal world more appealing than contributing to a group.
	Six: "The Guardian" -- Sixes have a love-hate relationship with risk. Quite gifted in recognizing worst case scenarios, Guardians may tend to either repress their fears or attack them head-on to prove to themselves that they are not afraid. Sixes are naturally drawn to facilitating a group such as an investment club, but can become cliquish.
	Seven: "The Epicure" -- Sevens have very active minds, and enjoy planning for the future in order to keep their options open if the present becomes too difficult or painful. Building watch lists or developing options strategies might appeal to Sevens. Their sense of adventure and need to keep moving can make it difficult for Epicures to stay with a "boring" system even when it is doing well. Sevens are great idea people, but follow-through can be difficult for them.

Instinctual Subtypes

Based on three primary drives of human nature, there are actually three instinctual subtypes within each of the nine types for a total of 27 different types. Sometimes the effect of subtype can be so strong that its influence is more distinguishing than the enneagram type itself. Ideally, the instinctual subtypes are in balance, but more commonly one or two predominate.

Learn more about Instinctual Subtypes at Enneagram Worldwide

Self-Preservation: The orientation is primarily toward survival. As Warren Buffet says, "The first rule of investing is 'Don't lose money' and the second is 'Don't forget rule number one'." These are traders or investors who have a very high appreciation for the importance of risk and draw down in their portfolio.

One on One (aka Sexual): The orientation is toward a significant other or close confidant. If this drive is strong, the individual will value in depth conversation over "mixing" with the crowd. These are traders or investors who benefit greatly by close association with other traders and can give to others in like manner.

Social: The orientation is towards a group or the well being of society as a whole. These are traders or investors with a strong desire to help other traders or to contribute to charitable causes.

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Investing Psychology