Watch Those Emotions When Investing...
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Here is some good advice from the Stock Detective:
Do your homework. Learn so much about a company and its industry that the
daily jiggles of its stock don't bother you. Try not to react to every price movement. If
you tie your moods to the tape, you're heading for trouble.
Check the volatility of a stock before you buy it. By knowing the normal
price swings of a stock, you will be alert to abnormal fluctuations that may signal that
something is wrong.
Write down your reasons for buying a stock. Every time the share price
drops, go back to your list. If there is an important change, sell. If nothing has
changed, hold - perhaps even buy more. Winners need patience. Stay focused on
your reasons for purchasing the stock in the first place, and stay with it as long as
those reasons remain valid.
Invest in different types of securities to diversify your risk. Even Peter
Lynch, one of the greatest investors of our era, wrote in his book One Up On Wall
Street: "If six out of 10 of my stocks perform as expected, then I'm thankful." No
matter what you do, you'll always have a few losers. If you make the mistake of
committing a majority of your capital to any one stock, you will feel elated as long as
it is soaring in a bull market. But let the bear start to growl, and you will spend
sleepless nights worrying about getting wiped out. These kinds of emotional traumas
are what lead to selling out at a low price.
Develop a philosophy of selling, and stick to it. Whether you decide to bail
out if you consider the price-earnings ratio too high or when your shares have made
an arbitrary price gain, don't budge from your plan. Setting up these kinds of
quantitative criteria brings discipline to your investing, and can provide considerable
help in divorcing yourself from your emotions. The investor who continually changes
his or her philosophy or jumps on every rumor and hot tip is an emotional investor -
and almost always a loser.
Don't have profit paralysis. Buying is fun and easy; selling can be
excruciating. Many people are paralyzed by the fear that if they sell, the stock will go
up without them. But if you cannot bring yourself to sell, you may never take a profit
at all. If it is just too anguishing to make a sell decision on your own, put in a
stop-loss order at a price you don't wish your holding to drop below.
Become the predator, not the prey. The price of a stock - even the market as
a whole - simply reflects the daily supply and demand for stocks and, in turn,
thousands of investors' emotions. Look for those times where other investors'
emotions are so low, they're going off the charts. If the company's fundamentals
haven't changed, these stocks may represent good values. By the same token, if
you're lucky enough to own a stock that has soared to unsustainable heights, sell
into that enthusiasm.
Jim |
