As human beings, we have emotions that cannot be turned off. Whether you want them to exist or not, there’s no way to prevent emotions from surfacing. Emotions are for the most part, extremely useful tools that have helped humans survive for millions of years. Take fear for example – when something terrifies you or threatens your life, you want your body to enter a state you never thought possible. Super strength and lightening quick reflexes are welcomed responses at this point.
Emotions are WORTHLESS as an investor.
Before typing that statement I thought long and hard about its validity. In school, you’re taught that phrases like always and never are giveaways to a statement being false. Not often is something always or never true. In this case, it is.
Fear, excitement, joy, regret, etc. – all have no use to an investor. Why would these emotions matter? There are thousands or perhaps millions of people holding the same position as you. Some have profited, some have lost money and others have broken even. That means that some are happy, others are angry or sad and the rest are indifferent. Several different emotions and the stock can still move in one only direction.
Not Just People Invest Today
Introduce machines into the equation and emotions become even more irrelevant. Whether you like it or not, machines have become a significant force in the market. From advanced algorithms set up to scrape tenths of a penny to robust systems that can buy and sell millions of shares in a matter of nanoseconds, they all share one thing in common – the absence of emotion.
Cool, Calm and Collected
As an investor, you must be cool, calm and collected. The ability make rational decisions about what to buy and sell can become your most valuable tool. Emotion actually makes you weak and exposes you to judgments that would normally not make sense. If you absolutely know that a stock is oversold and will move upward soon, a drop in price lower than your purchase price can cause a gut reaction to sell.
So how do you avoid trading based on emotions? How do you prevent yourself from panicking when you’re fearful that you might lose a good chunk of your net worth? You have to learn to recognize your emotions and address them accordingly. That’s exactly what this infographic will help you do.
Think, Don’t Feel, Before Trading
By identifying your emotions and how they may impact your actions, you can apply rational thinking to your situation. For example, if the stock you own comes out with negative earnings and declines 4% as a result, stop and think before you hit that sell button. You obviously thought the stock was a good investment before declining in price, so evaluate the recent earnings announcement and determine whether or not OTHER investors are overreacting. Chances are, if you thought about selling immediately in an attempt to minimize your losses, others have done that exact same thing. I can’t count the number of times I’ve seen a stock take a huge haircut only to rally and regain much of its losses by the end of the day.
That’s not to say that you should never sell a stock if it’s up or down in a big way, just don’t make that decision based on joy or fear.
READERS: When did you overreact based on emotions only to regret your decision afterwards?