The Impact of Emotion When Investing In Stock Market

Emotion when investing is a main reason you could be success or failed investor. It is not about knowledge but on how to handle emotions. The impact of emotion could make decisions that can dramatically impair investment performance. Most investor tend to focus on short-term volatility and in trying to reduce this emotional aspect, they invest in low return securities.

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Many investor limit themselves to stocks which are familiar and in turn, use emotional buying and emotional selling rules. The result is inferior performance over long time periods.

As we know, the stock market being dominated by emotional crowds, which effect the prices underlying fundamental. This make the value investing strategy failed as the resulting emotionally-driven price distortions. Most of us, not trying to outsmart other investors nor trying to out-analyze them. Insted, most of investor are trying to identify behavioral price distortions that can be harnessed. As a result, investor are frequently taking positions that are different and at times opposite the emotional crowds which created the price distortions in the first place. This means that they will receive very little social validation as you manage a portfolio or when discuss investment decisions with others. Successful value investing involves dealing with emotions in two ways :- 1) Control your emotions during the investment process. 2) Employ a strategy that objectively identifies price distortions which can be harnessed for the generation of superior returns.

Basic Concepts in Emotional Control

Invest in stock market is to create as much wealth as possibel. It is important the decision is through analysis. It is important to drive out emotions. Emotions couldn’t be eliminated but it could help to make important decision without fear to lose. In stock picking it is critical to master your emotions when making decisions. We’re not assembling a group of friends or family to pick a stock but instead identifying the best possible combination of stocks for generating the highest possible return. Don’t fall in love with your stock and when they cease to meet your criteria, sell them without regret.

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The best decision is based on the information available at the time and don’t dwell on past decision. SOme slections will generate superior returns and some will not. Accept the fact that at the time the investiment decision is made, it is not possible to know if a stock will be a winner or a loser. Aim for 60% or more winners, which means investing in losers comes with the territory. If we lose, it is not mistakes but instead are an expected part of the investment process. Never waste time and energy on regret or second-guessing past decisions.

There is substantial risk invest in stocks but a careful examination reveals that what many think of as risk is really an emotional reaction to volatility. Volatility and risk are not synonymous and so when talking about risk in stocks you should not be talking about volatility. Instead you should focus on the business and economic sources of risk and should largely ignore short-term volatility in such discussions. Ruthlessly driving emotions out of the investment process means short-term volatility plays virtually no role when making stock picking decisions. It is important for us to manage emotions as we put money to generate wealth. Many people keep on losing as they don’t really manage their emotions even they have good technicial or fundamental analysis.

Reference : The New Value Investing

Author : C Thomas Howard

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