We all have them. It’s what distinguishes us as humans. We may not want to admit it, but we all have emotions and attitudes that can and do impact our decisions for buying and selling stocks. These emotions can include: fear, panic, greed, arrogance, happiness, unhappiness, love, infatuation, and ego. These emotions often do an extensive amount of damage to a good investment strategy. At least with regard to investing, we would all be better served if we could remove these emotions from our psyche.
So how do we go about removing emotion from investing and learning to controlling our emotions? None of us can completely shut off these emotions. They are a part of our nature. They make up our personality. However, you can learn to keep these emotions from adversely impacting your investment strategy. And, by doing so, you can become a smarter, wealthier investor and not be continually buffeted by emotional ups and downs. Let’s study how two emotions, greed and arrogance, can influence our trading decisions.
When greed manifests itself, it becomes an all – consuming, propelling force. You no longer take the appropriate time to analyze your decisions. Suddenly, you find you’re no longer relying on your rules. All you can think about is stock tips and easy profit — big profits. Anything else is not satisfying.
Errors in judgment are the result of the momentum of greed. Mistakes will be made. When all you can think about is making an enormously huge fortune, then you set yourself up for failure. It is likely you are not doing a good job of following your disciplined investment strategy. Without a disciplined investment strategy, the odds dramatically increase that you will achieve consistent losses instead of consistent profits.
Now, let’s look at what happens when arrogance rears its ugly head. It is a good thing to be happy about your portfolio’s performance. But when happiness turns into arrogance, consistency in making profits becomes a thing of the past. And it is so easy to let arrogance come into your thinking. When your portfolio has several weeks of strong, consistent profits, you begin to say, “I haven’t picked a bad stock yet. I’m a stock – picking genius!”
Along the way, you begin to tire of following a disciplined approach to investing. You start making small mistakes. Instead of following your rules, you start following your hunches.
Hunch trading is one of the worst ways to trade, but it is one the best ways to lose money. Maybe some of these mistakes actually make you more money. (Almost every investor, in a bull market, becomes a stock-picking genius. Try your cards at Investment Gambling!)
When your arrogance overwhelms your common sense, you begin to set yourself up for potentially significant losses. Why? Because you have abandoned your rules for investing and now just rely on your “intuition.” Intuition is not a good investment strategy and will eventually lead to disaster. Don’t let your successes cloud your judgment. Stay humble. Stay smart. Stay disciplined!
If you agree to let a commonsense set of rules govern your trading actions to the extent that you trade only by these rules, then any emotion that might cause you to make poor investment decisions will absolutely be eliminated.
When you invest in the stock market, you need to do so in a calm, rational frame of mind. Remove emotion from investing. Allow the rules to make the decisions for you, and you will no longer be riding the roller coaster of emotion. Let the rules rule.