Emotions in the Stock Market

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October 5, 2017
Emotions in the Stock Market

Image Copyright Ted Grussing Photography – Used with permission

You may have heard us mention in past articles how our ‘emotions’ can prevent us from doing well in the market.

At this time most everyone’s emotions are running high concerning the market and economy. Fear is in the air and we want to encourage you today to separate your emotions from your investing decisions.

As Charlie Munger says: “A lot of people with high IQs are terrible investors because they’ve got terrible temperaments, you need to keep raw irrational emotion under control.”

There are two emotions which drive the market and those are greed and fear. Here’s an example we like to use to show individuals how greed and fear can control their own thinking:

  • Say you invest $1000 and over time you watch it go up to $1200…
    • Did you make $200?
  • Now say you wait a bit longer and you observe that the market goes down and your $1000 drops to $800…
    • Did you lose money?

These are actually trick questions. The truth is you didn’t make or lose money unless you sold.

When we see our investments go up greed can take over—we want to earn more so we invest more. Fear, on the other hand, rears its ugly head when we notice our investments going down and it drives many to jump out “before I lose any more money.”

But the fact remains that you didn’t lose money unless you sold. If we are brave and stay in, we have to believe that the market will go back up. The wise investors are those who buy what is down in value, especially since history shows the market continues to grow after downturns.

Remember, Wall Street is basically a huge selling machine. When you are excited about getting in the market and buy, a commission is generated. And when you become afraid and you sell to get out of the market, another commission is generated. Wall Street doesn’t care what you do as long as you continue to get in and out of the market. It does not want you to stay put!

Don’t let Wall Street dictate your investing behavior based on the emotions of fear and greed. If capitalism is still around we can expect the market to stay around and keep up its steady climb.

Have a great weekend!