Some people invest like Warren Buffett, calm and easy; others
invest like a bull dog, simply “hit” whenever they listen to any
rumours. Sad to say that, not everyone is fit to invest in the stock
market. Majority of the investors plunge in by emotions at the
wrong time and bail out by emotions at the wrong time. In
general, stock market preys on fear and greed, and it’s not
designed to reward the masses.
Warren Buffett said, “Unless you can watch your stock holding
decline by 50% without becoming panic-stricken, you should not
be in the stock market.”
Let’s take a look at the following common mental mistakes, and
see if you can handle them well:
1. Herd Mentality
We see this trait in the animal kingdom, such as a school of fish,
a flock of birds, and a herd of sheep. Like the animals, we feel
comfortable in doing things together – if more and more people
are buying a particular stock, most likely we will follow suit if
we happen to have some money in our pockets.
The way to profit from this phenomenon is to resist the herd
mentality and try to be a leader. In any crowd, or group
behaviour situation, the ones that lead are the ones that draw all
the benefits, while the ones that follow blindly are the ones that
take all the risks.
2. Gambling Behaviour and Speculation
It is believed that gambling behaviour and speculation are part
of our human basic trait. Statistics showed that 1.1% of men and
0.5% of women are “probably compulsive gamblers”. In general,
speculators often dictated by factors such as tips and rumours to
take advantage in the stock market. This behaviour is usually
unpredictable, short term and unwarranted.
I would strongly advise genuine investors to avoid following the
crowd blindly as it is always double edged situation – either
huge profit or heavy losses.
3. Greed and Fear
There are two cardinal sins: Greed and Fear, which are inherent
in human beings. For instance, we bought some stocks and we
are starting to make profits. Assuming we made a 50% profits in
a particular stock, our greed will tell us not to sell, as we are
hoping the price to go higher. However, it didn’t, instead it fell
back to the original price. One month later, the price moved up
by 10%, and our fears kicked in, spurring us to take profits. So
without a proper strategy plan, we are blinded by our own
emotions and instincts that prevented us from making the right
decision.
Hence, we should never let our emotions cloud our trading
judgment. What we can do is to turn the crowd’s fear and greed
to our advantage! To exploit the market psychology, we must act
in a contrarian way when the crowd falls prey to their emotions.
4. Overconfidence
Overconfidence can cause investors to underestimate risks when
investing in stocks. Studies have proved that investors who have
recently earned high returns will tend to take more risks in their
future investment (in stocks.) I’ve seen many of my friends who
fall prey to this emotion. They initially made tens of thousands
of dollars. However, due to overconfidence, they invested more
heavily than before and they even tolerated with much higher PE
ratios. As a result, they give away the gains back to the stock
market!
So, if you happen to have more than two of the above common
mental mistakes, please put your money into reputable unit trust
funds where you have professional portfolio managers to invest
for you.
"If you don't know who you are, the stock market is an expensive place to find out." George Goodman |
| Quotes |
| Tip #2 - Understanding Our Emotions |
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