Human’s are rational beings. We have the most developed brain among all species. However, in spite of all this, we are foremost governed by his emotions. It is said, man is ruled more by the heart than his mind. And these emotions, more often than not, play a huge role in man’s investments too. This is the sole reason, say, why the same person at one time might want to invest in the stock market, while at another time might find the same too much of a risk.
Investors may also feel attached towards a specific company and continue owning the stock without regards to its fundamental. For example, you might like Google’s search engine so much that you decide to buy the stock at $ 350 without doing any research. You figure that Google’s search engine is so much better that buying the stock will give you profit, right? Wrong. Now, I am not here to bash Google as an investment, but analyzing an investment goes beyond the products and companies. Most investors can identify good companies and products. It is quite easy. You know that a BMW is a better car than a Ford.
Emotions often also control the company one is investing in. Generally brand loyalties come into the picture here too. Example, if someone prefers purchasing his sportswear from Nike, he may want to invest in its stocks too, although the Reebok stocks may be doing far better. It is always better to conduct a proper research and check the latest trends rather than blindly following your heart. Keep in mind that you are currently dealing with the stock market and not the super market.
Google is a good search engine, probably the best that is ever produced so far. Sure, you probably pay more for Google than other generic search engines. But, please don’t over pay. You invest in Google to profit from it not because you like its products.
So, how do we eliminate emotion from our investing decision? We can’t eliminate it completely but there are certainly tools that might help. One is to calculate the fair value of a common stock that you are investing in. I covered this plenty of times but basically, the fair value of an investment is dependent upon the streams of profit generated by it. In the long run, if company A earns more than company B, then company A will be valued more than company B..
I know I don’t exactly give you the best solution to the problem. Emotion is hard to ignore. I am not immune to that. But following your emotion will cost you a lot of money. Don’t follow the herd and keep your focus on the fair value of your stock and you will do really well.
You need to realize that no matter how hard we try we cannot completely eliminate our emotions from playing a role while investing. But what we can do is apply equal amounts of common sense and logic. Always be aware that it is your finances that are going to be affected in this venture. Calculate the fair value of a common stock that you are investing in. The fair value of an investment is based upon the profit generated by it.
If, for a considerable period, organization A does far better than organization B, A will surely be far more valued than B. While investing, avoid the herd mentality, stay calm and always go in for the firm with the better fair value. This will ensure that you are a happy investor, earning high profits on your investments.