“The investor’s chief problem and even his worst enemy is likely to be himself” Benjamin Graham.
One of the biggest hurdles for people reaching their investment goals is controlling their emotions. Being able to distance emotions from the investment process is one of the characteristics that makes an investor successful.
Maintaining control of one’s emotions can be very difficult in the share market due to the abundance of information darting around. In fact, this commentary causes pessimism and optimism in the minds of investors. Fear and greed can manifest at different times of the business cycle and the market can become distorted because of this widespread hysteria. Investors who are aware of emotions and how they influence the market can use this to their advantage. For instance, when sentiment is very low about a stock, an opportunity may arise to invest at a discounted price.
Sometimes the company is intrinsically worth less, and sometimes it is oversold. Therefore, careful analysis is required to determine what action to take. However, many investors skip this step and get caught up in the negative sentiment. Likewise, when a stock or industry is considered ‘hot’, many investors rush in without conducting adequate research. In this case, FOMO causes investors to ditch their investment plans and instead chase the latest rage.
With that said, there are a number of measures investors can take to overcome their emotions in the market:
1. Block out the noise. There is a constant stream of news, hot tips and commentary available. Use this information for investment ideas, but remain critical and do not base investment decisions solely on such recommendations. Avoid resources that play on emotions instead of providing factual research.
2. Don’t invest more than you can afford to lose. This is always good advice, and is paramount to keeping your emotions in check. In order to remain rational in the market, you must be comfortable with the fact that you may lose your money.
3. Back yourself. After conducting your own research, you decide to purchase a stock because it represents good value. Although the share market moves up, down and sideways on a daily basis; do not get too caught up in these day to day fluctuations. The price over the long term is much more important.