Emotional Side of Investments
Emotions are key factors to success or failure in our lives. Through emotion of hope to make some money, we invest. The money, stocks, properties are well connected with emotions of owner. If you look at most of the decisions we make in our lives, emotions are key to success and failure.
1. There is no such thing as a good stock
There is only good companies. When someone tells you ‘this is a good stock’ you need to look beyond the stock chart. Why is the company a good company? How it will grow its business? If you can’t answer these questions, you don’t know what you own.
2. Know your risk tolerance
The biggest mistake most investors make is to buy positions with more risk than they can really tolerate. This is where most people got hurt in the Internet bubble burst. They have no idea they owned risky stocks. If you can always tolerate, both financially and emotionally, the complete loss of your entire position, you obviously will be okay. But most people aren’t in that position. Figure out how much downside you can live with without having to sell. Figure this out before you buy the stock.
3. Don’t miss the train to save a dime
If you are investing in a major trend through a stock, and have a multi-year investment horizon. What difference does a few cents per share make on your purchase? Many investors try to place buys with limit orders just below the ask, and wind up missing the purchase. If you really want a stock, particularly a big position, place a limit order at the ask or even slightly higher. You will at least get the order. This is especially important if you are trying to buy far more shares that the current ask size. If you are right about the trend, you will never miss the extra ten cents per share.
4. Have a reason for investments
A reason why you should buy this stock. Why and how the company’s line of business will increase and why the marketplace will value that business at current or higher multiples. Without a reason, you don’t own an investment, you just own a stock.
5. Don’t be a rigid long-term holder, if the reason fail
Sometimes, your Reason to buy a stock doesn’t work out, or you no longer believe in the stock, you must sell, even if it means a loss. Holding on just to “get my money back” is the single biggest reason for losing more money. Who own tech stocks that have lost 98% of their value in 2000. In other words, you can say “don’t fall in love with your portfolio -or it will betray you”. Think of wishful thinking by a person who is in love and does not see the nasty habits of his desire. Investors, similarly, mend to turn a blind eye to information that does not suit them and actively search for information that confirms that they have made the right investment decision. Be aware of this and don’t turn away from bad news about your portfolio.
6. Beware the gambler’s addiction
Addicted gamblers want to lose, not win. That is why they are easy prey when it comes to beating ‘the market’. According to Freudian psycho-analyst addiction of gambling is a disease. Before entering a casino you should see a psychiatrist to make sure you do not suffer from Neurosis!
7. Don’t average down to feel better
Averaging down is often a way to lose more. If you believe in the company and the price goes down, you may want to invest more. But if you, like many others, purchase more simply to lower your break even stock price, you are making a mistake. If you find yourself calculating new average price per share points, you might be averaging down for the wrong reason.
8. Blame your faults on yourself, not others
Heads I win, tails it’s chance. Blaming someone else for your mistakes and claiming the honour for your successes may seem pleasant. But it does not make you either good friend or a good investor. Moreover, you won’t learn from the past investment mistakes. Congnitive psychologists have labeled this behaviour ‘biased self attribution’. It leads to another empirically verified phenomenon: on average individuals are, overconfident. If you are over-confident, you trade too much, as you think you are smart enough to see valuable information in what is actually irrelevant news. The excessive trading lowers your return, as transaction costs exceed the return from trading.
9. Don’t buy hot and watch cold
Many investors buy a ‘hot stock’ and immediately look for big gains. When they don’t happen, the stock falls away from the daily attention list. Pretty soon it starts to edge downward and emotionally he investor stops watching it and those who bought stock, feel trapped. Pain avoidance is common to us all. But you can’t let pain avoidance prevent you from watching your stock. If you do, you often take a look two months later and find the stock is far from hot and you are now presented with a really painful decision.
10. You will have to dare to be a loser
In a success oriented culture this is a difficult lesson for many investors to learn. You cannot expect all of your investments to be successful. Even the best investors are not right all the time. But the success of each individual trade is not as important as the profitability of the whole portfolio. Sometimes it is necessary to sell the losers, for the sake of the wider portfolio. You need to become accustomed to losing money on some positions. This is explained more by rules 5, 7 and 9. Taking losses if often the only way you can save your capital from further losses.
