Emotions and Behaviour in Investing

To begin, Investing is the act of setting aside money to work and compound for us into additional income or profits while we are busy with our daily activities or work commitments.

Let’s face it, who would not want to grow their wealth and achieve a better level of comfort in life?

Unless you have been born with a silver spoon in your mouth / satisfied with your current living conditions, such as a roof above your head and food in the fridge, then go ahead it is not wrong. I respect that as well.

For those who differ, not to worry as investing is one way that we can do to improve our quality of life as we are all aiming to hedge against inflation and to grow our money over time while not solely relying on earned income.

When we talk about investing, we might be thinking of:

1. Stock Market
2. Wall Street
3. Buy Low Sell High
4. Exchange-Traded Funds (ETF)
5. Picking Individual Stocks
6. Index Funds
7. Fear and Greed

8. Warren Buffett

Apart from the fundamental and technical analysis that most investors have applied, I am convinced that it is also essential for us to learn about the emotions and behavioural impulses when we encounter them during the market’s ups and downs. No one has the ability to control the stock market or how exactly an investment will perform over time.

Even if we try to avoid potential declines – the greatest risks may not be the market fluctuations themselves, instead, it’s our reaction to these fluctuations.

The world of businesses and stocks is ever-changing. What’s worked in the past may not continue to work in the present. Besides this, investors are diverse, with different emotional constitutions, aptitudes, knowledge, motivations, and goals.

One size does not fit all. Hence, we should all work towards identifying and understanding our emotional investing behaviours while avoiding such costly mistakes to be successful investors in the near future.

Trying to time the market

Trying to time the market to find out when it’s the best time to get in is indeed difficult, even for the most experienced traders or investors.

Besides this, we are all looking at paper profits and paper losses. Only when you have officially sold the stocks, then the actual profits are acknowledged.

Bank of America had published a paper that quantified how severe the missed opportunity would be for investors who tried to time their entrance and exit strategy into the stock market.

(Source: CNBC, Bank of America, S&P 500 returns)

As seen above, the data starts from 1930 till the present. The firm found out that if one misses out on the S&P’s 10 best days per decade, the total returns will amount up to 28%. Whereas, if one were to hold steady through the ups and downs, the returns would amount up to 17,715%.

The authors also mentioned that it would probably take about an average of 1000 trading days to recover from the losses after a bear market.

While political uncertainties or market fluctuations make it tempting for investors to get out and wait for the situation to improve, it is extremely difficult to predict when to exit and re-enter at the right moment.

People tend to invest based on their emotions, selling after stock declines, and then missing out when the market is in a positive state.

Hence, the solution to this is straightforward but not followed, and it is to stay in the game, to stay invested, and not side-track to the side-lines.

Independent Thinking

Students in Institutes of Higher Learning (IHLs) with high-Grade Point Averages (GPA) are achieved through curiosity and diligence, but it is also possible to achieve higher marks by gaming the system, such as sucking up to professors, and regurgitating whatever information that they want to hear.

However, in investing, where one was to do nothing often prevents blunders, but mental laziness isn’t, and not thinking independently on your own is rather toxic. The entire game is to figure out what others might have missed.

I feel that the largest prizes/returns would go to those who have a different thought process and turn out to be correct. Some of the investing ideas may look foolish or crazy, but the alternative is mediocrity. Depending on the outcome, you might be called courageous or arrogant and reckless. I guess we should not be ashamed of mistakes/errors, only when we have failed to correct them.

While (IHLs) evaluate students based on quizzes, group projects, and term papers, the stock market will never tell you which specific questions to work on, how to approach them the right way, and whether you have mistaken.

Hence, we must be able to draw our own conclusions, even if it means going against someone’s stock choice/recommendation. Without thinking critically and independently, there’s no way to find out companies that are on sale.

Conclusion

To conclude, the most successful investors tend to be patient, rational, analytical sorts – intuitive and thinking in the psychological typology. The future is understood theoretically, but it is not yet a reality. Critical reasoning is a better guide to the stock decision than emotions, so an emotionally detached but aware approach works best for investors. Besides this, I feel that investors need to have a resilient mindset because the stock market dishes out a lot of failures.

One needs to think independently on their own, and be willing to stand outside the crowd, and agree to disagree. The market would eventually reward tolerance for ambiguity most when it is in short supply, so investors should keep a constant or countercyclical tolerance.

That's all, do comment and share your thoughts and perspective below!

I would love to hear them as well!