- The fear of losing it all
- The fear of missing out
- The fear of having unproductive assets
- The fear of making mistakes
Fear, or better too much fear leads us to making poor decisions. But the opposite can be true as well, especially during bull markets when we think we’re invincible.
I once felt that I had so much money, I impulsively bought a time share on my credit card. "Who cares, in a week or two I’ll have made enough new profits to pay for it." "Who cares, I have so much cash, I have to invest into something."
I have made more expensive investment mistakes when buying into all kinds of follies during booms than by buying during a bust. I have lost more money by selling during a bust than selling during a boom. It is not for nothing that many successful investors are contrarians, because many good investment decisions are so contrarian to human nature.
Often we don’t even know that a particular investment transaction is nothing but the result of emotions. And it is very difficult to sticking to an earlier decision. For example, after transferring cash savings to a brokerage account, I feel like buying stocks often in spite of earlier decisions that I shouldn't buy more in an expensive market. It is as if that stuff is burning a hole in my pocket!
How do you deal with such emotions? When the Russian armies were amassing on the border of the Ukraine this year; my guts shouted that Putin was a new incarnation of Hitler. The same was true for Saddam Hussein’s phantom weapons of mass destruction. On that fateful 9-11 day, learning that Al Qaeda was based in Afghanistan triggered my initial reaction: ‘bomb the bastards’. But looking back most of the time those responses were not correct.
Looking back on the Ukraine, I realize that Putin may have been lied to by the West; or at least that the West broke its promises. You see, NATO has expanded since the days the Berlin Wall came down contrary to earlier assurances by George H.W. Bush (senior) that the West wouldn’t if Russia didn’t interfere in the German unification. That promise was soon forgotten and NATO abused a weakened Russia (and allies) by assimilating many former East-Block countries into NATO. I guess, the West’s manipulations in the Ukraine was the last straw for Putin and he responded the way he did. Not that I think that Putin is a saint; but in the heat of the moment especially with a press more intend on sensationalized news sales if not on spreading outright nationalist propaganda, it is so difficult to see what reality is.
We are getting manipulated every day, whether it is with economic news and investment trends or whether it is in matters of war and peace. We are subjected to a barrage of biased, poorly researched, opinions and we get caught up in a maelstrom of emotions that prevent us often from seeing the facts. It is hard to stay cool and make truly well thought out decisions. To make matters worse, we don’t even know for sure if our emotional decisions are really that wrong; after all technical stock market analysis is all about the psychology of markets; we’re studying investor behavioral patterns and what about momentum investing? Are those not all emotion based investments?
If we truly want to be good investors we have to start with ourselves; know how we respond to events and examine if we should adjust our responses. Many of our responses may have been build-in genetically; they may be instant reflexes that save us in daily life; but when dealing with investment they may have been the exact wrong responses. Good investing starts with good self-knowledge and with controlling our initial response to events so that we can truly make the right investment decision.
Strange, is it not that so much of our actions ultimately are a result of who we are rather than based on the world around us?