Sins of Investing – Wrath (Part 5)

Having covered Sin 4: Envy in the previous article, I will be covering on Wrath in today’s article.

Sin 5: Wrath – Failure to solve the root problem

It is normal to get angry, however, getting too angry may result anger to cloud our judgement and causing us to make impulsive decisions that we may later regret. As a proponent of stoicism, we should always evaluate every situation calmly and rationalise things in a logical manner.

Ask yourself, during this recent bear market, where all the stock prices have been falling, what is your course of action? When you feel that sense of helplessness when prices keep tanking, do you start blaming i) The Company Management ii) Sell-side Analysts iii) China/Middle East for causing all the problems iv) Insanity of the market for constantly selling down your stock. Whatever the case, anger that is misplaced can have negative effects and result in us making bad investment decisions. We may just sell out of the stock due to the above reasons because we just wish to wash our hands off all these nonsense. However, is that the right course of action especially if the fundamentals of the company remains intact?

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Loss Aversion

On the flip side, there would be a group of investors who keep seeing the stock price tank who would just keep holding onto the stock. In behavioural finance we term this as loss aversion. This is where we are not honest with ourselves to admit the loss.

Individuals tend to believe that investments made should always work out. Truth is that they don’t and they won’t. Getting angry about a losing bet only delays taking the appropriate actions to correct it and in actual fact there are opportunity costs. The best course of action is to quickly identify the problem, solve the issue and move on. As the age-old axiom goes: “Cut losers short and let winners run.

Solutions

Here are some advice that I would offer:

Firstly, it is purely business, nothing personal. When investing remove all emotions from the game. Every decision made should be purely from a business standpoint and nothing emotional. Always focus on the bigger picture. We may make some losses today due to some investment mistakes, but learn from them and move on. In the longer run, we would make our money back as the current losses are only temporary.

Secondly, keep an investment journal. With every investment made, pen down your thought process and the main investment thesis. This way, when we see the stock prices tanking, we can refer back to our initial thought process and evaluate what has actually changed. This is an additional step to ensure that we remove our emotions from the investment decision process.

Lastly, vent your anger out productively. When I say productively, I meant through some avenue like sports or talking to a like-minded friend.

To conclude, be it in investing or life, we should never be too quick to flare up as it often results in situations where we would regret and feel even worse than before. Keep a level head with all things, evaluate the situation slowly before making a judgement.

 

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I developed my passion for investment management especially equity research at a relatively young age. My investment journey began when I was 20, at a point in time where markets were still recovering from the Global Financial Crisis. My portfolio started from money I saved over the past years and through working during the holidays. I was fortunate to have a good friend with common investing mentality to began my journey towards value investing. To date, we still research and invest in companies together, discussing valuations and potential risks of a company. To date, I manage a fund with a value investing style. Positions are decided upon via a bottom-up approach or smart speculation (a term I came up with when buying a stock for quick profit due to a mismatch in prices in the market due to takeovers/selling of a subsidiary or associate). Apart from managing my own portfolio, I enjoy sharing my research with family and friends, seeking their opinions and views towards the stock. Reading Economics in London, I constantly keep up with the financial news in Singapore & Hong Kong. Despite my busy schedule, it has not stopped me from enjoying other aspects of life. I enjoy a variety of activities in whatever free time I may have – endurance running, marathons, traveling, fine dining, whiskey appreciation, fashion. Lastly, I enjoy meeting new people, discussing ideas and gaining new perspectives towards issues in the world.