Emotion in investing is one of the most factors that impact your investment portfolio directly or indirectly. Humans are all emotional beings. We do not always make any decisions rationally. Emotion is part of us as investors also. Investors might feel better about any stocks at a certain point or they might feel that owning stocks is risky and avoid it at all costs.
Emotion in Investing
Investors may also feel attached to a precise company and continue owning the stock without regard to its fundamentals. So, this type of emotion in investing may be harmful to your overall investment. For instance, you might like Google’s search engine so much that you choose to buy the stock at $ 350 without doing any research. You reason that Google’s search engine is so much better than buying the stock will give you profit, absolutely right? No, it is Wrong. Now, I am not here to smash Google as an investment, but researching an investment goes beyond the products and companies. Most investors can recognise good companies and products. It is relatively easy. You understand that a Mercedes is a better car than a Ford or a Civic.
The next query is how much should you pay for a Mercedes or a Civic? This needs us to put aside our emotions for a second and think clearly. Sure, you’d appreciate having a Mercedes in your life. It is luxurious and has a lot more fancy characteristics than a Civic has. But, that does not imply you should overpay for it. It works similarly to stock investing if you are using emotion in investing.
Google is a good search engine, likely the best that is ever produced so far. Sure, you presumably pay more for Google than other generic search engines. But, please don’t overpay. You invest in Google to benefit from it not because you like its products.
So, how do we eliminate emotional investing from our investing decision? We can’t eliminate it entirely but there are certain tools that might help. One is to calculate the fair value of a standard stock that you are investing in.
We covered here at Authne this plenty of times but basically, the fair value of an investment is dependent upon the streams of profit yielded by it. In the long run, if company A earns more than company B, then company A will be appreciated more than company B.
For a business that is growing such as Google, you can incorporate its growth and estimate the fair value with growth. We have written about this earlier in many articles about investment and you are welcome to check these articles and understand, how does it work?.
I know I don’t precisely give you the best solution to the problem. Emotion is very hard to ignore. I am not immune to that sometimes. But following your emotion will cost you a lot of money occasionally. Just watch those investors that bought during the Nifty 50 peak in any bull market. Also, following investors, who buy during a bear market, it give you the best analysis of stock, and how can you pick during both market strategy. Don’t follow the pack and keep your focus on the fair value of your stock. You will do really really well while managing your emotion in investing.