Investing goes beyond being able to read and interpret financial statements.
It is a game of the mind, a psychological warfare with ourselves.
Common Mistakes that cause Emotional Investing
Awareness of 3 mistakes and taking 1 corrective action will help steer us in the right direction.
1. Being Too Confident
The stock market never fails to humble us whenever we get too greedy.
Common examples are having an overly concentrated position, chasing stock market gains, or speculating in meme stocks (read: gambling).
The peak of the COVID pandemic coincided with the stock market rally.
If you were part of the crowd who bought growth stocks, you would have made more money than you could ever imagine.
To some extent, I was sucked into the narrative of the growth and “stay at home” stocks.
While I had some initial success, the years that followed were a carnage for growth stocks.
Luckily, position sizing came to my rescue.
Lesson: Always remain humble and grounded when making money from the markets.
The best investing decisions are made when we respect the risk of the market.
2. Being Too Fearful
The flip side of being overconfident is being overly fearful.
Blame the media. They are designed to strike fear into the hearts of the masses.
If you’ve been following the news, I’m sure you would’ve heard recession being mentioned on multiple occasions.
A narrative that has led to many investors selling their stocks out of fear, locking in huge losses in the process.
No prices for guessing the beneficiary from all this retail selling.
Instead, I believe there are great opportunities in the stock market today.
There are always good bargains to be had when there is excessive fear.
To use a poker analogy:
Would you fold if you had the nuts (just because someone puts you all in)?
3. Lack of Discipline
Every investor has their own framework and risk appetite. Sometimes, we may lose our discipline by buying a lousy business.
I’ve made that mistake more times than I can remember.
When there are no good ideas, be patient and wait for opportunities to emerge.
Like how you wouldn’t just marry or date anyone, don’t lower your standards by introducing bad companies into your portfolio.
You don’t always need action. No action is an action in itself.
You don’t need to be getting in and out of the market. Sitting on cash is a position in itself.
Investing is a game of the mind. The strongest mind wins.
The Key To Avoid Emotional Investing
Automating your investments is a powerful way to remove emotions.
I have first-hand experience with this, from the employee stock purchase plan (ESPP) offered by my employer.
Setting aside a fixed sum to buy has netted consistent double-digit returns for me.
Here’s how you can automate the entire process of buying.
Set a monthly plan on your brokerage
On a specific date every month, your brokerage will buy a certain amount of stock (determined by you).
Explore the variety of options available, such as online brokerage accounts like Moomoo, which the Monetary Authority of Singapore regulates. Find the perfect account type to match your investment aspirations and personal preferences.
Join Our Free 2-Day BOS Value Investing MBA
At the Buffett Online School, we believe in learning the right investing mindset and system to cultivate emotional detachment and grow our wealth safely and substantially in the long run.
Our next 2-day BOS MBA Value Investing Online Bootcamp is happening soon! We will teach you how to use Warren Buffett's proven investing method to maximize your portfolio.
Remember, you can cultivate the right investing mindset and unlock your potential to build wealth through intelligent investing. Together, we can create a network of educated investors who make informed decisions and contribute to their financial well-being!