- Published on Tuesday, 08 May 2012 04:55
- Written by Jagjit Singh
- Hits: 1114
BEFORE I pose the above stated questions to my avid readers, let me candidly admit that I am not a specialist on human psychology and thus can’t predict with certainty as to what drives your investment decisions.
But if we keenly observe one’s behaviour over a time involving varied circumstances, then for sure we can predict correctly. An experienced long-term investor once told me that when he looked at his face after a share market fall he found despair and fear, while the same face showed enthusiasm and happiness with a share market appreciation.
This made me to realize that “greed and fear” were the two magnetic forces that caused confusion in his investment goals. Greed and fear are the major players in the stock market. These two emotions are the driving force behind almost all market participants – institutional mangers, stockbrokers, investors, traders and you as a common investor.
You might be saying to yourself that greed and fear will never get in the way of my trading, but believe it or not they will be. It is not something to be ashamed of. It is something you have to admit to, come face to face with it, if you are to become a successful trader or investor.
What do greed and fear look like in the investment decision arena? Warren Buffet has summed it nicely by stating that “we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” Fear doesn’t form in a vacuum. It is a learned response to a particular event or probability.
In the case of investing, when you have a trade that goes bad, the regret and frustration can carry over into the next transaction. Or worse, the fear is so consuming, that you don’t enter your next trade. This particular problem is fuelled by the expectation that every trade you enter should be profitable.
If you truly believe that, then here is an important piece of information for you – not every trade will be profitable! Greed creates the opposite problem. With a couple of consecutive winning trades, the ego can enlarge and feeling invincible overcomes being logical. This will ultimately lead you to trades that you normally would not have entered.
My close look at investment behaviour has made me realize that fear and greed are not separate but complimentary emotions of any investor. Greed is merely a mental state born out of fear, with investors feeling the fear to lose money and then being unable to meet their family financial obligations.
In addition, social pressures to earn in line with close relatives and peers provide for benefits like higher education in a prestigious college, a grand marriage for children and a house with all modern amenities and furnishings leads to greed. So what is the solution to avoid greed and fear to determine one’s investment decisions?
At first place, do we have the one in today’s greedy world? We completely seem to have forgotten the difference between our needs and wants and this is how greed has an overriding effect on all the decisions we take. But if you can’t succeed in weeding out the menace of greed and fear, I am afraid you will never reach your goal of financial independence. So what do we do in this situation? In my considered opinion, a balanced and objective approach would help you to achieve long-term financial goals.
Aim at lower returns for market forces play a very vital role in deciding the price. It is good to be investment smart with humility and lower aspirations that makes achievement of financial goals a reality. I have never known of any high return investments that did not have high risks. Patience over a lifetime and being able to assume stress helps in aiming for long-term positive returns and contributes to assuming less financial stress after retirement.
Positive investment behaviour requires balanced moods, one of neither elation nor panic. Neither selling in a panic due to share market positions or adverse world or country conditions is advisable, nor is a reaction to extreme financial prosperity, both can destroy a lifetime of healthy investment. A longterm investor needs to realize that neither despair nor elation of situations in civilization proves worthy for long term financial portfolios.
From hereon I am sure you would neither allow emotions, group behaviour nor your personal likes and dislikes, to influence your long term financial goals. It is true you would have also realized that patience, humility and appetite for stress could contribute to long-term achievement of your financial goals.