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Tuesday, September 1, 2009

How to control your emotions to become a Successful Investor

As human beings, we are guided by our reason and emotions. Some times the brain dominates. Often it is our heart, or our 'guts', that tell us what we should or should not do.

Thinking logically, using common sense and life experiences in decision making, and controlling emotions is what sets homo sapiens at the top of the animal kingdom. These are life skills, that one needs to learn and practice constantly to become a successful investor.

The two over-riding emotions that tend to take hold of small investors are greed and fear. It is greed that makes us jump into the stock market feet first without adequate preparation - in the hope of making a lot of money without doing any hard work. It is also greed that make us hold on to a winning position for too long - often turning a big winner into a small winner or even a loss.

It is fear that keeps many investors away from the vicissitudes of the stock market - seeking safer and lower returns from fixed income options, like bank fixed deposits or monthly income schemes at post offices. It is also due to fear that we sell a winning position too soon, only to see the stock reach stratospheric levels.

Those are not the only emotions that a successful investor must learn to control. There are others, which emanate from our inability to accept the fact that we can, and do, make mistakes that cause a big loss or a big loss of profit (which seems different, but isn't - when you come to think of it).

Many young investors, who have lost substantial sums of money through erroneous investments, approach me for guidance about how to recover from their losses quickly. Wish I had a magic wand to wave around and solve their problems.

There are no quick fixes in life, let alone in investments. To be a successful engineer, you have to be good in maths and put in several years of study and practical training. To be a champion tennis player, you have to learn the basics at a fairly young age, and then put in years of practice and physical conditioning.

Unfortunately, many young investors think that opening a demat account and an online trading account is all the experience necessary to make pots of money. What were they thinking? If making money in the stock market was that easy, no one would be toiling away in offices, or hospitals, or law courts, or factories.

A recent email from a member of an investment group is indicative. He had lost a large sum and is in the process of trying to recoup some of his losses by trading in a particular stock. His main reason for choosing the stock? Market manipulators haven't yet taken control of it.

So, to the investor, the reason for the losses were not his unpreparedness, but some unknown and unseen 'manipulators' who were playing games with an innocent investor to deprive him of his hard earned money!

Blaming some one else - be it a tyrant boss, a father who is a hard task master, a strict teacher, and in this case, invisible 'manipulators' - is far easier than being man enough to admit, 'I made a stupid mistake. I am the cause of my problems'.

Learning to control your emotions, accepting responsibility and the consequences of your actions, and being pro-active about assessing the steps required for achieving financial success are skills that can be taught and learned. Such skills will form essential mile posts on your journey to become a successful investor.


Anonymous said...

Hello Sir,

It is really hard for every investor to control their emotions, but if we have some target in front of us then it become little easy, so can you please guide me on how to find out resistance and support level and price target of any stock or index,

Subhankar said...

Thanks for your feedback, Titu.

There may be others who have the same questions - and it is a topic that needs more detailed discussion.

I'll write a blog post about supports, resistances and price targets on Thursday (Sep 3, '09).