Keep Emotions out of Investing…its a Disaster

cramer125.jpgHuman’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.

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6 Responses

  1. zakman says:

    Robin you make such a valid point the roles of emotions, brand loyalty and investments.

    I use product A because generations of my family have been using it. I use product B because it’s James Bond’s brand. I use product C just because it’s ‘lucky’ for me.

    I will continue to use products A, B & C even if I know and am aware that there are other brands that deliver better results.

    It’s a rather emotionally tough task to invest in another brand than the one you’re attached to, but mature investing demands just that.

    Thanks for the reminder.

  2. Robin Bal says:

    Hi Zakman,

    Good point mate, you are using something because you are emotionally attached to it and probably not trying to look at better options available.

    Never fall in love with the stocks you have bought, you picked them to make a profit, do that and get rid of it and look for better options.

    Cheers mate and take care.

  3. Excellent post mate!
    I agree with Zakman also!

    In most business, if emotions are too “present” it is very possible it will ruin things. I agree with you on the Google thing you mentionned (guess i have a thing for google recently lol) there are other advertising options out there. If you take emotions out of the equation usually it makes more sense to do this and that, in business rationality has it’s place, that’s for sure :)

    Great post buddy!

  4. Robin Bal says:

    Hi Jon,

    Thanks for appreciating the post mate. Absolutely right, emotions play a major role in most businesses.

    Its not easy to get this emotion out of your system easily while investing, we have to be shrewd. Take out of it what you bought it for and dump it, thats just about. They say whenever a stock is bought or sold, a sucker is born 😉 .

    I have the same good thing for Google too 😆

  5. Jag says:

    Always love a discussion when it comes to my favorite topic of investing psychology.

    Humans can be more irrational than we think. Greed and fear drive people to do crazy things at time.

    It is applicable to many areas, whether is it investing, or consumerism.

    The only way to profit is not to be emotional.

    Cheers,
    Jag

    P.S Congrats on the new PR! Have been rather busy lately so have not been dropping by as much. Good to see that you are still coming with good posts, as always!

  6. Robin Bal says:

    Hey mate,

    Good to see you back.

    You are absolutely right, we have to keep emotions away if we want to profit.

    Thanks on my PR.

    Take care and cheers.

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