Know How Fear and Greed Impacts Your Investing Decisions
We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful – Warren Buffett, a legendary investor
Much has been written on fear and greed in the market, which are the two great human emotions responsible in destructing capital in investing. Fear and greed can be explained in simple words – fear is the emotion which comes from lack of confidence and greed is the emotion which comes from over-confidence.
Fear and greed are the most important psychological emotions which make a big impact on the investing aspects. Almost every new investor experiences these two emotions, which cannot be totally removed or escaped from. But they can be balanced to accomplish a successful investing. Let us have a look on how these feelings affect your investing.
Do you know what makes a person fear while investing? It could be fluctuations in the market or fall in prices. This is nothing but the volatility in market that causes fear. When markets panic, fear sets in. At the time of fall in prices, people fear in two forms – fear of losing or fear of missing out.
There will be fear of losing a great opportunity and this fear of loss leads to selling of stocks prematurely and as a result they do not make profit on the investment. While the fear of missing out is another form of fear, which leads them to follow the rules of investing in order not to lose out on another major stock move. This can also be due to watching out speculators or market makers influencing investors make irrational decisions which they later regret.
Then what about greed? When does a person feel greedy? This emotion can arise due to rising markets. Greed is the opposite emotion to fear. It is the emotion which wins over fear and promotes over-confidence. With the rising markets, investors become greedy and hold on for longer positions, or often make random trades, which they are not supposed to do in their investing system.
So, it is the emotional control that is the key component, an investor must exhibit while investing. True success depends on this psychological strength of the investor. Thus fear and greed have to be dealt with to maintain your focus and not to get swept away by illusions.
Below are some useful tips to balance your emotions – fear and greed. These tips help you regarding which stocks to buy, what to avoid and when to protect your winnings.
• Know your facts – do your homework
• Don’t buy stocks just because they have gone up or stop considering buying something because it has gone down
• Choose and stick with companies that have established track records of business performance and ethics
• Don’t make decisions based solely on emotions
• Think sensibly – don’t worry about agreeing with crowds. Worry about being wrong. Better to be alone and right
• Many people succumb to juicy stories that capture their imagination and compel them to make wrong choices
• Buy a business and not a stock. A good business’ stock price will increase if the performance is solid
• Invest – don’t speculate. Once you buy a good business, give enough time for the results to come
Fear and greed always drive the market and influence investors in volatile and rising markets. The key is to remain constant and conscious of your thoughts, beliefs, and control your emotions especially while investing. If you follow the mentioned above factors, you will be able to buy despite fear and sell despite greed and continue the holding of a stock. So don’t believe in market makers; take these factors into account before you start using your emotions to make your investing decisions.