Kirby on Finance

Emotional investing doesn’t work!

Last week a few stocks that I owned began to sell so quickly that I thought my broker had begun to just burn the stock certificates themselves. I began to panic because I thought a few of them were overbought and ready for a crash. Luckily the other part of my brain, the part that’s always calm and rational took over. A few of the stocks that I owned had no business selling like they were, and the ones that may have been overbought had strong arguments as to why they were still good buys for the long term. I decided not to sell. This decision saved me roughly $342 dollars as of the time that I write this.

I’m not writing this to brag that I was able to control my emotions and avoid panic selling. I often succumb to those feelings, but this time I avoided it. In fact, every time I’ve either bought a stock that I had no business buying, or sold a stock that ended up going on a nice run, I look back and try to figure out why I made the move that I did.

I’ve been looking toward growth stocks to avoid the daily stress of momentum stocks, but in the past I’ve usually bought stocks that were on an upward tear. It’s worked well for me, but the stress of doing it just magnifies all of my weaknesses. This has allowed me to figure out what triggers my emotional selling so that I may notice it and hopefully avoid it before I make the same mistakes again.

Jason Zweig of Money Magazine recently wrote an article addressing these issues and offered a few ways to help outsmart your brain and keep those rash, emotional decisions at bay.

“Whether your investments beat the market is largely outside your control. But some things are entirely in your hands: cutting your tax and brokerage bills by trading less often, and keeping your expenses down by relying on index funds or lower-cost managed funds.”

I think this is pretty good advice but really you do have much more control than Jason suggests. You’ve got to be able to research a company and know exactly why you wish to own it before you invest. If you can’t offer reasons as to why the stock would also be a bad purchase then you’ll probably not done enough homework to invest.

“If watching financial TV or clicking on investing Web sites gives you the itch to get rich quick, turn off the sound or use the “history” window on your Web browser to count how many times you visit the site each day. Just like a smoker trying to quit, you may need tricks like these to help bolster your self-control.”

This is right on the money. You don’t make a lot of money off the market overnight. If done well its continuous growth over time that will make you rich.

“Making an investing decision while you’re inflamed by the hope of a big gain is a terrible idea. Instead, reconsider after your anticipation circuits have cooled off. If you like a stock, try waiting two weeks without ever checking its price. Then study the company’s financial reports to estimate the per-share value of the business. Afterward, you can check the current share price—and invest only if the business value is higher.”

This goes along with what I said above. It’s rare in life that snap judgments work, and it’s probably even less likely that it’ll work in the stock market.

Related posts:

1. Emotional Investing Doesn’t Work! Last week a few stocks that I owned began to sell so quickly that I thought my broker had begun...
2. An ETF Primer, Part #1 In addition to regular personal finance articles, this week I’ll start a discussion regarding ETF’s. This series will cover the...
3. It’s a confusing time of the year for me. I hate weeks like these. There are so many reasons why a stock my rise or fall in the last...
4. Creating Teachable Investing Moments I’ve mentioned in a few earlier posts that I’m obsessed with the stock market. I’m “that guy” who seems to...
5. An ETF Primer, Part #2 For the next installment of my ETF Primer, I’ll be discussing ways to evaluate ETF’s and how to go about...

Related posts brought to you by Yet Another Related Posts Plugin.