10
April
2018

Emotions In Investing

The problem of emotions in investing

All too often, human nature causes us to be overly influenced by our emotions rather than logic. This is particularly relevant when it comes to our investment decisions.

For a long time now, we have been aware of the fear/greed cycle that amplifies investment market peaks and troughs. Yet, time and time again, we repeat this behaviour. We chase the returns and create a bubble.  As I write this, we are seeing this with Bitcoin, people are buying for the sole reason that they think it is going up.  This is nothing new, we had the Tech bubble where anything and everything in the technology space was being bought, prices went through the roof. Most people buying shares did not even know what the companies they were buying into actually did. Some companies had yet to make any revenue at all and had a market value in the tens of millions. Is this logical?  Nope, it’s greed dictating our investing habits.

When the markets fall the reverse is true. We panic, we sell, we get out as quick as we can. In the Global financial crisis, as markets fell panic set in, with good reason initially, and we saw people selling good quality stocks for fear. Commonwealth bank fell to about $24 per share.  At the time, the dividends were about $2.60 a share, more than 10% of the sale value. There is no logic involved in selling at that point, that is a fear based sale.

On an individual basis, our emotions really influence our decisions. Recently, when Uber listed on the stock exchange, an investment analyst gave a recommendation not to buy.  He provided data in relation to revenue and profit (Uber is not profitable) as well as future market risk etc.  Essentially, he had provided a standard, emotionless investment report for a company about to list. For most companies this would get zero attention outside investment circles. This report was shared many times and criticised roundly as being from a dinosaur and alike, why? Because Uber was a market disrupter that many have positive feelings towards, automatically they assume it is a good investment. Many probably invested in it for this reason. The reverse is also true, companies such as James Hardie which a have a negative public perception, make people reluctant to invest in them. Our feelings towards companies influences our assessment of them as investment opportunity.

We also get attached to our investments, this is quite common with things like houses. We find it difficult to offload the investment when the time comes, so we’ll often we hold on to it even if it is no longer in line with our goals, or the investment itself is no longer appropriate.

As hard as it is, when investing we need to be as emotionless as possible, this will dramatically increase our chances of success.

Categories: Future Financial Services Blog

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