Unwanted Emotions
We need to be aware of the two most prevalent emotions that are responsible for wrecking portfolios of many ordinary investors: fear and greed.
Emotions and investing do not mix together. Yet, as humans, we feel different emotions all the time. It is practically impossible not to feel emotions, especially when money is at stake.
Investing is About Buying Low, Selling High
Almost everyone who has ever invested, has heard the saying: Buy low, sell high.
While it may be perfectly clear what this saying expects us to do, it is extremely difficult to apply it in real life of an investor. The reason is, of course, emotions.
We will look into some principles of eliminating, or at a minimum controlling, emotions from investing process at some other time. For now, we just want to make sure you are aware that fear and greed have a detrimental effects on our investing.
Emotions Want Us to Sell Low and Buy High
Unfavorable emotions of fear and greed always creep up at the most unfavorable times.
When prices go down and value of our investments declines, the emotion of fear takes over. Fear wants us to sell and get out of the trade to ease the pain of (unrealized) loss! If we are not in the trade, the fear locks us out from buying. However, not buying low and especially selling low is quite the opposite from what successful investors do.
On the other hand, when prices go up and value of our investments appreciates, the emotion of greed takes over. Greed prevents us to sell due to wanting more profits. We can also say the fear of missing out (FOMO) develops and we may even be tempted to buy more (that is known as “price chasing”). However, not selling high and especially buying high is quite the opposite from what successful investors do.
The success in investing is achieved by buying low and selling high. Not the other way round! Emotions of fear and greed stand in the way of our success as investors.