2021-09-02
Fear and Greed are the emotions that most of the investors have no control at all. Warren Buffett stated it elegantly: “Be fearful when others are greedy, and greedy when others are fearful.”
In simple this is what happens among emotional investors. “We buy a stock expecting that it will go up. Then it goes down, and we hold on because it would hurt our ego if we had to admit we were wrong. Or we tend to buy too high at times because we see a stock going up, and we want to get in on the action. We end up buying at the highest price out of greed, and then the stock tumbles”.
Expert investors always stick to Technical/Fundamental analysis, looking for that perfect predictor of market turns. But many get carried away by the herd. This is completely normal as we have a fear that we would be isolated if we don’t go with others.
Tips every investor should follow to avoid emotion-based investing
- Invest in Knowledge- Have a mindset shift
Avoiding emotional investor behaviour starts with a mindset shift. You must stop thinking of your investments as short-term assets and stop dwelling on the daily fluctuations in your net worth. Take a long-term view of your wealth. If you have done your Fundamental Analysis and Technical analysis right and entered and quitted at the right points, you are one of the very few who does the investment right.
- Enter trades based on the plan, not on emotion.
Have a stock screener with you. We sketched a screener in Fundamental Analysis video course. Monitor critical parameters over time. Get used with few key stocks and focus on them and set the strategy. Ask from yourself, "Am I doing this out of greed? Or due to fear?" But when you stick to a plan, you don’t even need to think about it. Enhance your knowledge in Fundamental & Technical analysis to excel in this.
- Play knowing your risk tolerance
I know how much I stress the importance of being a rational investor and to skip emotions, you love to play. Ok, you may do it once in a while, but set your border strong which is your maximum tolerable limit to risk your capital.