EMOTIONAL INVESTING

Successful investors:

• Are very disciplined 

• Have a rational investing process that they follow consistently

• Base their strategy on facts and data

• Are students of the markets

• Understand the cycles and risks of the markets

• Do not react to fads

• Keep their emotions under control

Unsuccessful investors do the opposite.

And the biggest thing that hurts unsuccessful investors is emotional investing.  Emotional investing is behind most of the major investing mistakes.

Overconfidence leads to problems for a lot of investors, particularly younger investors. Overconfident investors:

• Read one article or one book that leads them to believe that they can outsmart the market 

• Are not as skeptical as they need to be

• Are drawn to the newest investing fads

As a result, they end up getting burned.

Overconfidence starts to creep in after periods of high growth in the markets.  At the time of this post, the Nasdaq had increased by 77% over the last twelve months with most of those gains driven by huge increases in the Magnificent Seven stocks. Nvidia grew by 176% over the same time period. People who invested in the high growth stocks are now thinking that they are investing geniuses.  

Experience in the markets will humble you.  Just when you think you have it all figured out, the market will punish you.  Hubris will cloud your judgment.  Overconfidence will make you sloppy.

Greed is another emotion that leads to costly investing mistakes.  Greed has many of the same impacts as overconfidence. 

• Greed clouds your judgment.  

• Greed leads to chasing sketchy opportunities and taking on too much risk

• Greed causes people to follow the crowd and to get into opportunities when it is too late

• Greed causes people to act too quickly and without all the facts

• Greed causes investors to focus too much on the short-term and “get-rich-quick” ideas

At the present moment, people who missed out on the big moves in Nvidia and the other Magnificent Seven stocks are often envious of the people who made a lot of money in those stocks.  They tend to buy at the top of markets and suffer big losses when the market turns.  

The technology growth stocks typically climb the highest in bull markets but they drop more in bear markets.  

I am not saying that people should not invest in growth stocks.  I am saying that you should not buy these stocks based on an emotional reaction to a recent trend.  Investing in stocks like today's Magnificent Seven should be part of a long-term strategy by investors who are well aware of the stock market cycles.  

The other strong investing emotion that affects more people than the emotions of greed and overconfidence is fear.  

Fear is one of the strongest human emotions that impacts every area of our life.  Fear is part of our survival mechanism and is designed to keep us safe by avoiding danger.  

Investing fear leads people to safety.  Investing fear causes people to put too much money in safer, interest-bearing assets that provide low investment returns.  Fear causes many people to avoid the stock market altogether.  

Fearful investors can limit their losses in market downturns but it comes at a steep cost - not having enough money in retirement due to poor investment returns.

Fear also causes people to sell when markets bottom out.  Many investors throw in the towel after they have suffered too much in bear markets.  By doing so, they make those losses permanent and miss out on the inevitable bull market recovery that follows.  

I created my Market Signals Investment System to counteract our natural tendencies to invest emotionally.  It is a disciplined and quantitative investing approach that is a “get-rich-slow” system.  Market Signals takes advantage of the highly volatile cycles of the market to make lots of money in good times and to avoid losses in bad times.

If you want to be a successful investor:

• Stay humble

• Stay skeptical and wary

• Avoid greed

• Don’t let fear cloud your judgment

• Be deliberate

• Seek out data to prove or disprove investing strategies

• Keep your emotions under control

• Stick with proven and disciplined investing approaches and methods
  

Stay Disciplined My Friends,

Phil

---

Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.

Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.