One of the things that I have learned is that if we want to make money in investing we have to control our mammalian and reptilian brains. We have to think very coldly about our investing and not let either fear or greed over take us. In fact this is good advice in general if we want to get ahead. I am not saying to deny our emotions but to learn to control them. After 9/11 America lashed out like a wounded animal and engaged in a pointless invasion of Iraq, all because we could not think clearly because we were so upset. It is in times of crisis that we need to think most clearly and realistically.
Too many people sell at the bottom and buy at the top because they are carried away by the collective emotion of the market. Riding a bubble can be very profitable but people need to keep their wits about them and avoid the mindless herd instinct to collectively jump off the cliff.
I like this summary from the Financial Intelligence Review:
Tip #3: Remove Emotion From Investing
It can get ugly when people allow their emotions to get in the way of trading. Very ugly.
The two emotions that can do major collateral damage to your portfolio are fear and greed.
Fear usually enters in when people start to see the market pull back. They will start to check their portfolios on a daily basis. They watch their portfolios shrinking in size — and when they can’t stand it any longer, when they think that there is no hope, they SELL.
The vast majority of the time, they sell cheap, and they sell for a loss.
Meanwhile, smart investors are buying with both hands.
Greed usually enters in when people are making a ton of money in the market. They have delusions of their stock picks and mutual funds doubling, tripling, quadrupling — and beyond!
Greed is why Las Vegas exists; it’s why Americans leverage themselves with credit; it’s why people buy lottery tickets.
Bubbles exist because of greed. The real estate bubble was a result of people flipping houses to make a bunch of money (greed), and it was the mortgage companies trying to make more loans — even if it meant zero-down adjustable mortgages (greed).
And greed will destroy a person’s finances (and those of their families).
When the stock market starts going up and up, and when people hear how much money their friends are making in the market, they start buying. Once they see the results. . . they buy more.
Meanwhile, smart investors are selling with both hands.
Warren Buffett, perhaps the world’s greatest investor, has said, “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
When people allow emotion to get in the way, especially fear and greed, their portfolios are in for an ugly ride.
You can take emotion out of the investing equation by following our previous tips!
- Form a Financial Brain Trust of your own. Stay well informed from trusted sources.
- Avoid financial clutter from the masses, from “financial experts,” and the media.
Create a game plan, and stick with it. It takes work, but it will pay off.