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?