Emotions In Stock Market Investment

I came across a short article from yiyezhifu regarding some kind of emotion in investment. I find it quite interesting. If you can't read Chinese, here is the point:

• In investment, the hardest thing to swallow is not losing money, but seeing other people earning more than you.

Your investment portfolio may have generated handsome return, perhaps achieving your target. However, when you browse the investment blogs and find out that there are other people doing better than you, you become unhappy & think that you don't do well enough.

You do a thorough study on a stock and decide to invest in it. This stock performs well and you make a good paper gain. Then you see someone recommends a stock in his/her blog and everyone rushes to buy except you, and that stock gains more than yours in a short period of time. You feel emotionally "imbalance" and frustrated, as those people who do not do their homework seem to be more successful than you.

These feelings may affect you negatively, even though in fact, you have done well and are on the right track.

So why do you need to compare with others?

There are lots of emotion in stock market trading, happy, sad, excited, angry, regretful, frustrated, greedy, fearful, anxious, depressed etc. I guess every investors will experience all these at certain stage.

For most people, when their shares go up, they will be happy & greedy. When their shares go down, they will be sad, anxious & fearful.

However, some people might also feel sad when their shares go up, because they think they don't buy enough!

You hear from a friend that stock X is a good buy. You decide to put your hard-earned money into it.

After you buy stock X, its share price move sideways for months. You feel frustrated and sad, especially when you see other stocks soar in price. 

After a while, you are used to it and claim that you are lucky because you don't put too much money into this lousy stock X. You decide not to invest further in stock X and just let it rot by shifting your radar to other stocks.

Soon after that, share price of stock X fell drastically. You feel anxious & fearful as you lose money. You are reluctant to sell because you don't want to make loss. Your mood is down, you can't concentrate on your work and suffer a few sleepless nights.

Weeks later, stock X makes a recovery in share price to your entry level. You feel optimistic and lucky that you don't sell earlier at a loss. However, you are fearful to put more money in. You plan to sell as soon as there is net paper gain.

After this, stock X suddenly jumps in share price. You make 20% paper gain in a week. You are excited but you don't feel too happy because you think that you don't put enough money into it. You regret that you don't pick up more shares especially when stock X is trading at a low.

You make good paper gain and is supposed to sell for profit. However, greed takes over and you think you should not sell this time as it can go higher. You then buy more shares of stock X as it goes further up.

Unfortunately, stock X retreats and your paper profit shrinks from 50% to 20%. You feel frustrated and regret again. Why don't I sell for a 50% gain? You earn less and are not happy with it. So you decide to hold or even buy more to average down, hoping stock X will rebound to its previous high again.

It turns out that stock X's share price falls further. You see your gain wiped out and turns into paper loss. You go mad as a 50% profit turns to a loss. You are angry, you have bad mood all day long and eventually become depressed.

So you decide to let it rot again, and again and again.

What actually do you want???

I think it is not easy to keep our emotion in check while investing in share market. It takes a lot of time and experience.

The best way to minimize this emotional risk is to buy fundamentally strong stocks, have a clear plan no matter it is for short term or long term, and be disciplined enough in executing the plan.

While it is good to compare our performance with others to see how well we have done, we should not take it too seriously. 

In everything that we do, there are always someone who will do better than us. Besides, there are also many others who perform poorer or are less fortunate than us.

Anyway, it is always easier said than done.