Hello Friends. EMOTIONAL INVESTING... There has been considerable discussion lately about emotions when making an investment decision. Allow me to give you some thoughts based on my own experiences.
1.) You will have emotions when you make decisions. It's human. Whether it is getting frightened and you panic sell at a loss just to preserve capital, or sell to capture huge profits, you will have emotions involved. The same applies with buying a position. The key is learning to manage and control the emotions when you make that decision. You do not want the decision driven by emotions. That is not prudent investing at all. That's first grade investing.
You must not let the emotions interfere with the rationale basis on which the decision should be made.
2.) You must learn to manage fear and greed. These two factors are the extremes on the scale of what drives an emotional decision. This is where you can make your worst mistake. You must learn to manage both extremes. It takes discipline. It takes experience. It's not easy, of course. However, to be a successful investor, you must learn to analyze, study issues and facts, and be prepared to calmly look at situations. This will help keep emotions in control and especially fear and greed.
There have been numerous posts on here the past two weeks describing decisions that were made to buy or sell that were based on nothing but emotions, pure emotions. Some of those same individuals later in the day were questioning why they did what they did just earlier in the day. That's not prudent investing and you know it.
3.) Discipline is essential to manage emotional investing. It takes discipline to overcome that fear and greed that drives so many poor decisions based on nothing but emotions.
Over the years I've worked hard at this specific point. As a result, I'm the most disciplined investor I know. I'm not saying that I don't get emotional when something happens and I have to decide whether to react. However, I have learned to step back, force myself to look at things logically, and buy myself some time before I make that decision. It is sort of like going through a cooling off period before I make that decision to hit the button, so to speak. Oftentimes, that few minutes or an hour that I take to rethink things allows me to curb my emotions, calm down, and ultimately make a much smarter decision. Many times that decision is significantly different than would have been my initial decision.
It takes a lot of self control to overcome those emotions. It's hard to do. It takes time. It means commitment. It takes discipline.
4.) You must have a plan. I have written on the need to have a plan for months and months. I've given you example after example where my plan has helped me execute in a way that allowed reason and logic to rule over pure emotions.
A plan doesn't have to be a lengthy detailed multiple page document. My plan is quite structured yet brief and simple. The key is that I execute that plan. No emotion is involved. I can make a decision that involves huge amounts of money and I won't blink an eye. I have my plan, I stay with it, and I execute it.
Having a plan helps me prepare for what needs to be done in advance. As a result, I'm better prepared to decide what needs to be done when something happens to one of my positions. A plan is wonderful to help control emotions. It helps you stay on target, to stay focused.
If you don't have a plan, it's like a ship with no rudder. You wander out there with no direction, reacting to emotions. The result can be poor decisions.
Get a plan. Stay on target. Execute it. Be smart.
Also, get a life plan. I believe in having a life plan as well, and the investing plan must fit with your life plan. If you have not drafted out a life plan, sit down today and start! Get control of your life. You are it's CEO.
Good luck my Friends.
Rick |
