Controlling Your Emotions As A Stock Picker by Mawunyo Adjei
“The investor’s chief problem, and even his worst enemy, is likely to be himself”, stated Benjamin Graham, the father of value investing. Emotions can run anyone’s daily life, if they will just let it. As a stock picker, being led by your emotions can be a threat to your health and wealth. There is an uncompromising need for self-discipline in the business of stock picking. Your reaction to emotions in making financial decisions is very essential in order to have an advantage over Wall Street.
Investors who adopt only short term investing strategies are at a higher risk of emotional investing. Warren Buffett stated in an interview after he successfully invested in Petro China that “I did not look at the price first; I looked at the business and try to figure out what it’s worth because, if I looked at the price first, I would get influenced by that.” The oracle of Omaha made $3.5billion in profits when he sold the stock which he had bought for $488million. Price greatly affects investors’ and consumers’ buying decisions. Wonderful prices can influence a stock picker to buy certain stocks he or she had not initially planned for. Thus, it is very important to figure out the worth of the business first.
Earlier this month, value investor Mohnish Pabrai took part in a Q&A session with William & Mary College students. Q3 2021 hedge fund letters, conferences and more Throughout the discussion, the hedge fund manager covered a range of topics, talking about his thoughts on valuation models, the key lessons every investor should know, and how Read More
The average investor sells too early when a stock begins recovering. Usually, this is guided by an emotion called ‘fear’. Overconfidence is another dangerous emotion which is eating up lots of investors especially in this bullish market. An investor sees a trend in the market or a particular stock which has a history of consistent failure and then says to himself “this time it is different”. Sir John Templeton calls it the four most dangerous words in investing.
To keep your emotions barred from your stock picking paths, the first thing you will need is patience. Patience can be learnt by anyone. Be patient enough to wait for something within your circle of competence. Feeling pressured because your fellow stock pickers are up or performing much better than you this year will just make you take certain emotionally-driven financial decisions. It’s very advisable to postpone certain buying decisions especially the ones which are generating everyone else’s attention. Moreover, read more about the stock which keeps echoing in your mind. I once stumbled upon a stock on market which had a name that I thought was funny. The name sounded in my mind for days till I read more about the stock and found out it was actually a ‘falling knife’. Knowledge is a great tool to prove your emotions wrong. The Chairman of Berkshire Hathaway, Warren Buffett, was asked about how to become smarter, he simply said “Read 500pages, every day.” Usually, when you are holding cash or when you have surplus capital in your possession, so many ideas rush into your head and impulse buying might set in if you allow it.
Besides, be sure to choose your own events. If reading a particular newspaper makes you want to sell all your stocks, then just replace it with another habit. Avoid scenarios that give birth to that emotion. For instance; if watching videos or reading about tech billionaires make you want to flood your portfolio with tech stocks although you don’t understand the technology industry, then replace the habit of watching such videos or reading such books with something else. Your reaction to an emotion says so much about you and what you are made of. I personally don’t know how to avoid not feeling any emotion but I know how to regulate the expressions of emotions. Get your focus on something else, if it is a thought; replace it with something else which involves talking.
Finally, possess an uncompromising investing strategy and stay-driven. As Jason Zweig notably said “Investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”
About the author
Mawunyo Adjei is an Investor Buying Behaviorist. He is a consultant to a number of investment managers and firms, pointing out their emotionally-driven financial decisions and teaching them to be ahead of the crowd of investors.