How I Invest, Part 5: Avoid Emotional Decisions

(credit: YoTuT via Flickr)

(credit: YoTuT via Flickr)

All through my investing career, from the early days when I had good advice and lots of support, up until now — when I’m basically working on my own — I’ve made lots of mistakes.

Most of my mistakes are a direct result of my emotions taking over my reason — although at the time it feels like I’m protecting myself. Let me explain.

Part of my problem could be that I’ve never clearly defined what kind of an investor I am. If asked, I’d say that I’m a long-term investor — in it for the long haul. I pick a stock to buy believing that the company I choose to invest in has good growth potential, a steady pipeline of new products, an excellent financial base, and good management.

Since I know that the market itself is fickle, the stock price of that “excellent” company will have up and down days, but over the long haul, I believe that the direction of the stock will be up.

Unfortunately, at times — especially when the market is bearish — I can behave more like a day trader, reacting quickly to stock market movements. But, unlike a good day trader, it’s my emotions rather than my reason that is driving me. It’s at those times that I’ll buy or sell a stock at exactly the wrong time.

I’ve bought more shares in a company I own when the price is on the way down thinking I can double down my cost basis, and that I’ll have larger profits when the stock price goes back up. Seemed like a great idea to me — except the price of the stock doesn’t always go back up, rather it keeps going down, and down, and down. Oops.

And, still thinking my plan is a good one, and I bought even more shares — and the result was the same. Double oops.

I’ve even panicked a short time later and sold all those extra shares, and then the stock price recouped. Triple oops.

How about if I expected the price of a stock to go down because I thought that’s the direction the market seemed to be headed, and I sold a bunch of shares. But the market movement down was only temporary – its real direction was up. Oops, again.

Two interesting points from my mistakes:

  1. Investing mistakes are easy to make. Even professional fund managers make mistakes.
  2. The really sad thing is that I haven’t really learned that much through my mistakes other than recognizing that my emotions can take over my head when the market is acting erratic.

Despite my mistakes, I’ve gained abundance through investing. And even though I get frustrated because I can make the wrong decision sometimes, I quickly forgive myself.

Although I’ve lost money because of my mistakes, so far I’ve not made a mistake so bad that it’s stopped me from continuing to invest. Over the long haul, I’ve learned to be a more careful investor and to take the emotion out of (most) of my investing decisions.

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About Liz Stauffer

Liz Morningstar Stauffer’s improbable journey—from a divorced mother of two at the age of 34 to a millionaire some 15 years later—has inspired her to create the blog “The Improbable Millionaire," offering tips, advice, stories and support for people on a similar journey—even if they don’t know it yet!

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