(market psychology/art)Mind Over Money/ Necessary Cautions
financialweb.com
........Mind Over Money
For Investors, Emotion is Your Enemy
For some people, playing the financial markets is a little like flying.
If the flight goes smoothly, you're relaxed enough to calmly munch peanuts and sip soft drinks. But hit turbulence or an air pocket, and it's white knuckles and straight bourbon - or maybe an airsick bag - the rest of the way. Although the odds are against it, a crash is always in the back of your mind.
Whether playing the markets or flying the friendly skies, you must master your emotions if you are to succeed, not to mention survive.
Internet chat rooms like The Silicon Investor offer a fascinating insight into the irrational emotions of many investors. Woe unto those relatively prudent souls that attempt to deflate the rags-to-riches dreams of these participants with a bit of healthy skepticism: "Why are you on this thread? Why don't you just slither away?" Or: "What is your real purpose here? Are you a short seller?" Or this rose-colored view: "I've been a shareholder [in XYZ Corp.] for over a year, and I truly believe I will be rewarded... and the world itself will be rewarded from [XYZ's] technology."
These are the words of persons ready, willing and able to lose their shirts. Do they sound like someone you know? Do they sound like you?
THE DUBIOUS ART OF BUYING HIGH AND SELLING LOW
For investors, price is the prime mover of emotions. As long as a stock is going up, its owner feels good. If the stock plunges, however, his mood may sink faster than the stock, causing him to bail out at a low price. If emotions control your investment decisions, you will consistently buy high and sell low.
Everyone knows that stocks fluctuate, yet most of us don't know how to handle these ups and downs. An investor buys a stock at 15, and even though the company has not experienced any important changes, it falls to 10, rallies to 14, drops to 9. After many twists and turns, it climbs back to 15. All too often, the investor's response at this point is to give up, saying, "Whew! I'm even. Now I've got to get rid of it." Very often, when the investor looks back a year later, he discovers to his chagrin that the stock has soared without him.
In many investors' minds, there is a price level above which they will not even consider selling. Below that level, they sell all too readily. Once this "mental stop" is broken, emotions take over. The stockholders are no longer investors; they're pawns in a great stock market psychodrama.
An example of pure emotion at work is the desire to hop on a stock that has soared for several days or weeks. Such a stock is launched with an explosion of volume, rumors and tips. If you're in early, you may make a lot of money, but most people - swept up by an emotional, irrational hope that the shares will somehow defy the laws of gravity for just a little longer - hop on AFTER the big move. The later you climb aboard, the closer you are to the top, and such market missiles usually blow up at the height of expectations.
All of your emotions come to the fore when you are considering selling a stock. There is the fear that if you sell, the stock will soar, and if you don't, it will collapse. Nothing is more difficult than deciding when to sell, but stocks seldom go up forever. Caring too much for a stock could undo you in the long run. If you can never sell a stock, you are kidding yourself.
Don't become emotionally attached to a stock. If you are going to be a successful investor, you must have the discipline to sell when everything looks great, and when the company president says "business couldn't be better," it probably won't be.
When you do unload a stock, you may feel seller's remorse. "Maybe I sold too soon," you say. Every day thereafter, you check the stock's listing in the paper or on the Internet or you call your broker and ask, "By the way, just out of curiosity, how is that stock I sold doing these days?" And if it has performed well, you may say, "I held the stock 18 months and the minute I sold, it went to the moon!"
Once you sell a stock, don't look back in anger if it goes higher, or gloat if it stumbles. Only look back to learn something. Maybe you sold for the wrong reasons. |
