Is Emotional Investing Making You Lose In The Stock Market ?

Some things fit perfectly together. Strawberry jam and butter. Batman and Robin. Red and white. Individually they have value but when they come together, they create something extraordinary.

The same cannot be said for emotions and investing. Like oil and water, they simply don’t mix. There is no place for emotional investing in the stock market world if you want to have success.

My Emotional Investing Experience.

I started investing seriously in 1990, during the start of the bull run of the 1990s that saw the stock market soar to record highs. During those times, a stock could go up $1 or more in a day and there were plenty of stocks doing that everyday.

People were going crazy investing in the stock market. Everyone were involved; from clerks, housewives, salesman to taxi drivers, because they did not want to miss the bull run. It was a crazy period for the stock market.

This was the investing world that greeted me in my mid-20s. It seemed like everyone was getting rich overnight. Many investors were becoming millionaires. The short-term trend was the keyword of the day. Get in and get out as quickly and as often as possible to become rich.

As you know, in 1997 the market finally broke. Stocks fell like a stone, the decline sharply accelerated by the financial crisis that engulfed the country.

Lessons On Emotional Investing.

Going back to these past years revealed to me that I had to find a way to keep emotion out of my investing life. This is because the emotional investing cause me to do irrational things that I will regret later and make me lose money in the stock market.

Here are a few key lessons I learned during those years:

Never Fall In Love with Your Investments.

Investments should not be a love affair. Yet that is what happens – people fell in love and got married with their investments. We fall in love with that one special stock and ended up being blinded by that love when the stock turn south. We think that as long as we love the stock it will love us in return. It just do not work that way when it comes to investing.

Dreaming is Dangerous In The Stock Market.

We always trick ourselves into thinking the trend is going to stay that way a long time. I would always think about “how much I could make” should the stock continue to climb. Dreaming about what might happen kept me from making a wise decision.

I was up more than $5,000 on a penny stock in 2011 which would have been a gazillion percent return on what I had initially invested. The way the stock had been trending it seemed the only direction was up. In my mind, clearing $10,000 was certainly doable. So I sat on it instead of selling and realizing that big return.

To my dismay, the stock started trending downward the next few days. My return began to decrease but because I was dreaming I fooled myself into thinking it would eventually turn around. It never did and I ended up with less than half of the gains I’d been dreaming about.

Never Make a Trade Based On Something You Hear In The Media.

The news media specializes in charging up your emotions. Call me cynical but I think emotional investing is part of their agenda. It drives people to tune in to hear what they have to say.

So the media reported some groundbreaking news on a stock …..and within 10 minutes I had made a trade, hoping to profit on an upside movement in the stock. That upside never materialized. And of course I lost money on the stock.

Quit The Short-Term Thinking.

A short-term strategy charges up the emotion whereas a longer-term strategy dampens the emotion. Thinking 10, 20 or 30 years down the road helps put the mind at ease during any given crisis. You will end up making rational, wiser and more profitable investing decisions.

The Benefits Of Mastering Your Emotions.

If you can keep your emotions in check many good things will happen that will vastly improve your ability to succeed at investing.

You will have courage to invest when the market is in pain.

When was the best time span to invest in the market during the last decade? In the course of those periods when the market dropped sharply during 9/11 in 2001 or crashed in 2008.

Everyone was panicking during those months and shortly thereafter. Emotions and emotional investing make you do that. So investors sold, just “to get out” at any cost for fear of losing everything.

Those who kept their emotions in check and put money into the market during those bleak times are sitting on a gold mine of returns today as the local market now sits at over 1,800.

Keep you from cashing out when times are good.

The stock market have been making new all-time highs these few years. Analysts are beginning to warn about the next 20-30% drop in stocks. “Sell now” they say, “and wait for a reversal to purchase stocks at lower prices.”

This once again promotes emotions (fear) and should be dismissed by the long-term investor. The market being at an all-time high really should not bother me. The risk is actually losing out on the continued upward movement in stock prices. If prices do fall, with my emotions in check I will continue to invest when times are bad.

Keep you from making silly mistakes.

One of my greatest wishes is to have those early years of investing back. I would have done things differently. I recalled I routinely let emotional investing (greed and fear) get the best of me. When things were going well, I felt unstoppable. When things were going poorly I’d feel like a failure.

And during the high and low states of emotional investing, I made some terrible investment decisions.

Conclusion

My message for you today is to keep emotions out of your investing life. Forget emotional investing. I’m not saying it will be an easy task. When the market was in free fall I was as nervous as the next guy. But I kept my emotions in check and continued investing like normal. Mastering your emotions and reducing emotional investing as much as possible is the key to big time success. If not, you will end up making terrible mistakes and losing out the big returns.