The Emotional Investor Part 1

Many serious investors out there must have heard of or read the investment classic “The Intelligent Investor” by Benjamin Graham, the father of value investing.

I have my own version – The Emotional Investor.

The emotions associated with investing (or trading/speculation for that matter) are very real! And may I add very counterproductive, even harmful as well!

When one is emotional, sense and level-headedness are thrown out of the window. It blinds the most intelligent of people. It clouds the judgement of even the wisest of them all.

What deadly emotions are we talking about here?

1. Greed

So what’s new? Greed has been present in men since the very beginning of time. The insatiable urge to squeeze out more money, every little ounce of them. I for one has experienced this before, many times in fact!

Greed is one of the worst destructive emotional behavior.

Have you ever found yourself in a situation where you are supposed to take profit, quit the trade, but decide to stay on longer just to earn a few more percentage points, and in the process going against your own rules?

I have.

Ever wanted to go in at the low (or so you think it is), because you desired a dirt cheap bargain which may give you the most potential of profit, despite  the fundamental and technical picture looking real bad? And then finding yourself neck deep in water? 

I have (but fortunately I encountered this when I was paper trading. Didn’t lose any real money).

This is some real examples of greed at play. Highly destructive. And one of the prime reasons why many have lost a big pile in the market, who will then go on cursing their luck and so on, where in actual fact, they have only themselves to blame.

2. Fear

Everyone have their fears. The investors/traders are no exception to this

Fear of losing their profit.

Fear of incurring further losses.

Fear of missing out on the hottest stock.

Fear of losing control.

Fear, like greed, destroys. It discourages more than it stimulates. When fear strikes, you lose your composure to think. And when you do not think, you will face a hard reality check -  your vanishing hard-earned cash!

3. Hope

You see your stock rising up. You hope it goes up even more.

When you see your losses mounting, you hope it has reached the bottom, and the only way left is going up again.

Hope. Hope. Hope.

Many people do that. Just hoping, praying and doing nothing, but usually to no avail, when the situation can easily be brought under control by taking some simple actions (e.g. cutting losses).

Hope gives people a false sense of security. Putting it in a blunt manner, they sometimes end up deluding themselves.

Putting it all together

The emotional investors, filled with greed, hope and fear, are often the most irrational ones. When these people come together and act as a whole, the market goes crazy. The madness of the irrational crowd in full force if you will.

You want proof?

Do a Google search on all the following classic ”bubbles” and “crashes” cases throughout history and you will know why.

• Dutch Tulipmania (1634 to 1638)
• France’s Mississippi Bubble (1719 to 1720)
• South Sea Bubble (1720)
• Roaring ’20s U.S Bull Market (1924 to 1929)
• The Great Depression (1929)
• Japan’s “Bubble Economy”
• Internet Dot Com Crash (1999-2000)

Notice how such “bubbles” and “crashes” move in cycles?

Well actually markets do always move in cycle. Always has been, always will be. And the sentiments and psychology of the herd will always play a major role in them.

Why does it keep happening? It is so, simply because the nature of man do not change! Greed, fear and hope will always be there! This is true centuries ago and will continue to be so centuries later.

Want to win in this zero sum game called investing? You can, if you achieve the following:

Keep your emotion in check.

Be a cold blooded unfeeling robot.

Dare to be a contrarian (in appropriate moments). Be greedy when others are fearful and fearful when others are greedy, as Warren Buffet once puts it. (A little ironic here since we are taking about suppressing our emotions!)

You will be ahead of most people.

I’ll leave you with a picture I found most intriguing which details the psychological cycle of the market. It gives a visual picture to the famous quote from a famous investor, Sir John Templeton about bull market – “It born out of pessimism, grow on skepticism, mature on optimism, and die on euphoria.” Enjoy!

Pic courtesy of The Big Picture

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[...] I wrote about greed being one of the worst enemies of every [...]

I feel that we just need to be rational in what ever decisions we made.

[...] I wrote that greed is one of the worst enemies of every investor out there. Now we have someone proclaiming that [...]

[...] wrote the first part somewhere at the start of February, and wanted to post the follow up a few days later, but somehow [...]

Wow Jag, this is a fantastic post, and as I have said before I love your writing style, simple and clear. I show that graph (The big picture) to clients when they panic. I have been investing since a long time and my guru taught me to stay away from greed, its hard, but it just doesn’t work in investing. Had I known about this post I would have surely linked it., anyway next time.

Cheers mate.

Hi Robin,

Wrote this some time back already.

Thanks so much for the complement. I guess the feeling is mutual. Your writing style is great as well!

Some greed is good, but on most occasion, it is destructive, and it definitely hurts investors. That is also the reason why I don’t look at prices during trading. I only check them after market hours, as I don’t want to be affected by the intraday price movement.

Cheers,
YongSing Jag