Are Your Emotions Keeping You From Beating The Market?

masksEmotions getting you down?

Or driving you crazy?

It’s a pretty safe bet that emotions are the #1 reason why most investors underperform the stock market.  Either we get greedy and buy a company for too much, or we get scared and sell for too little.

If you do the opposite, it’s probably enough to beat the market over the long run.

What’s ironic is that if everyone controlled their emotions, on average everyone would lose to the market.  The only winners would be those balanced precariously on Lady Luck’s shoulders.

Thankfully for you and me, that just isn’t the case.

Two centuries later, people are still crazy

Money, again, has often been a cause of the delusion of multitudes. Sober nations have all at once become desperate gamblers, and risked almost their existence upon the turn of a piece of paper. To trace the history of the most prominent of these delusions is the object of the present pages. Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.

(Preface, Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay, 1841)

Almost two centuries later, these words still ring true.

If you can stay sane while the world is going crazy,you can do better than the market.  All you have to do is refuse to buy businesses floating high on a bubble, sticking with businesses that are selling at a discount, and then be willing to scoop in and pick up the best values once the bubble has burst.

Don’t catch the fever, and you can turn your emotions upside down and profit while everyone else is running off a cliff.

But there are other ways emotions can make you do silly things you will regret in the market.

Breaking up is hard to do

Once you buy a stock, you become attached to it.

Even exceptionally talented investors can have a hard time looking at a stock they own with different eyes than at the rest of the stock market.

When it goes up, you pat yourself on the back and tell yourself good job.  When it goes down, you might ignore the loss and hope the stock returns to the level you bought in at.

I know, I’ve done both.  We all have.

But it’s stupid.

You shouldn’t get attached to a stock just because it’s your stock.

If you would buy an identical company today (completely ignoring its past price history), you should hold onto the stock or add to it.  If not, seriously consider selling.

Don’t let your attachment to a stock keep you stuck in a relationship you’ll regret.

Over to you

Have any good stories on how emotions have gotten you to do something stupid?  If you want, you can share below.

And if you want someone to hold you back from running off that cliff, subscribe to Happily Ever After Investing today.

  1. 1. Writer Dad

    For the most part, I’ve done well with my stock picks. The only time I lost money in any measure worth noting was in HomeGrocer.com. I just “felt” it would do well, despite evidence to the contrary. Stupid, stupid, stupid.

    I also sold my Apple stock when it was under $30 a share, but that was because I wanted to buy a house. Still though, wish I had that in my portfolio now.

    Writer Dad’s last blog post..How to Easily Keep Your Family Connected in 20 Minutes a Day

  2. 2. Jeremy

    Yeah – even when there is evidence that shows it’s not a good idea to hold on, the feeling that it’s going to do fine is what has made me hang on many times.

    Luckily the facts themselves often bring on another emotion, fear, before it’s too late

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