Emotionally Invested

The gurus, the books, the university researchers, who comment on what we do day in and day out would have us believe that investing is a purely unemotional venture. It is about sifting through the companies’ numbers. It is about looking at the charts. It is about company reports. Financial theory has us mapped between the axes of risk and return, while ‘behavioural finance’ tries to explain why as investors we sometimes behave irrationally.

But try and sit down with one of us and question, what is it like, emotionally, to have your stakes riding on the whim of other market participants, the policy of the bankers, or even the weather?

The indecision of what to do when watching the share price of one of your holdings plummet double digit percent in a short period of time.

The self-flagellation of exiting a position too soon, for not having enough conviction of your own analysis. ‘Never look back’ some say, but we know we kick ourselves often enough for our mistakes and error of judgement as investors.

The doubt as to whether we are good enough to beat the performance of all the other investors. Some of them who seem so lucky, so smart as to make the right calls all the time, seem to know of ‘that stock’ way before anyone else has even heard that the company exists?

Investors are humans after all. We too, feel dread, fear and panic. Elation, excitement and euphoria. Does it mean then, to be an excellent investor one must keep a tight rein over his or her emotions, be more Spock and less Captain Kirk?

In addition, there are other emotions. How much of that area under the price curve is propped up by hope and faith? Hope that the company would succeed in its growth, faith that the company’s management wouldn’t screw you over.

And if once burnt, would we be twice shy? How many times must the company miss its forecast before the investor throws in the towel? How many chances do we give and on what basis? How much do we trust the CEO’s explanations? Is trust even an emotion?

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4 thoughts on “Emotionally Invested

  1. Hi, interesting thoughts, nicely presented.

    I think that it depends where you’re invested TBH. Larger, easier traded stocks have all sorts going on: analyst coverage, machines trading their shares…the list goes on.

    A bit further down the food chain and I believe that the stocks seem to move more on fundamentals, as well as the odd news leak prior to the RNS.

    Management get but one chance….once a liar – always a liar. Or investors could just leave junior oil and mining alone….most of the liars are concentrated there 😉

    Regards,

    DS

  2. You made me think.

    From trying to observe myself.

    All decisions are rooted in emotions which cannot be controlled. You can’t make a decision without some emotional impetus and there will usually be lots of different conflicting and reinforcing emotional thoughts between decision and action.

    Intellect is mostly used to justify/rationalise your decisions after they have been translated into actions. That’s a waste of time but we all do it (to bolster our egos?). However, you can also deliberately insert some intellect into the translation process so as to create some interplay between different emotions and partly decouple your actions from your emotional thoughts. You can do that well or badly. You can learn how to do that better once you have divined what ‘better’ means. You can seek to avoid situations in which unwanted emotions arise. Of course, having done that you can always get waylaid by fear or greed as you hover over the sell/buy button.

    So maybe there is no such thing as irrational behaviour. It’s just behaviour that appears to be in some way inconsistent with the emotional drivers. And I can’t really say what my emotional drivers are anyway because they seem to arise from the subconscious as a bit of a mish-mash.

    I suggest the only sensible reason for DIY investing is to enjoy the learning process. Does it even matter if you lose money as long as you can afford it?

    There is a thing you can do in your mind which observes when an emotion arises (say the fear of loss over a premature sale) and quickly lets it go. I have noticed this when having near misses whilst riding my bike. If you get worked up or angry about them when they happen, then they will rankle for a long time. Sometimes you can just immediately detach from the incident (almost laugh at it) and carry on with no bad effects. I guess that is trainable.

    Trust might be a feeling rather than an emotion.
    Maybe you could call it a secondary emotion. Maybe it’s just a mechanism to enable us to function without being frozen by fear.

    At a personal level it can be quite binary? It’s hard to work with someone if you don’t trust them, and you can quickly go right off someone.

    With CEOs and profit warnings, it’s not personal. Probably better if you don’t know much about them. Feelings of trust are inappropriate. Maybe just look at their track record, were they competent and/or honest in the past? Try to factor that in to your judgement of what they have just said. Does it even matter if they are honest? They could be honest but incompetent or vice versa.

    You have to trust yourself I guess.

    Yours ramblingly.

    Walter Hanagan

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