Blogging at A Young Investor, Tony shares his investment strategies and his thoughts on the financial markets -
Investing is an extreme game: when you lose, you feel like crap, but when you make money and outsmart the market, you feel like you’re king of the world. So how should you emotionally deal with both situations? Do you bang your fist against when table and scream insults when you lose a chunk of money? Should you party for a week after making a huge profit? The answer to both is no.
- I admit that I’m no novice when it comes to losing money. It feels like you’ve been punched in the guts and the wind’s been knocked out of you. Many investors dwell on the pain, unable to get out of the “losing psychology” trap. Here’s what you should do.
- Stay calm and keep your emotions in check. A lot of money is lost when investors make investments solely based upon their emotions.
- Many investors make the mistake of investing after they’ve been hit with a loss in hopes of making back what they lost. Doing so will definitely magnify your loss (hence why people say “losses beget more losses“). The important thing right now isn’t to make back the money you lost – the important thing is to rebuild your self-confidence. Confidence is key when it comes to investing, because you’ll have the conviction to stick to your position through rough times.
- Do something to take your mind off the markets. In order to calm down and take measure of the situation, you need to step away from your investment. Do something fun that you enjoy.
- Once you feel calm, take some time to think about why your investment lost money. What something in your original market hypothesis wrong? What can you do next time to prevent a similar mistake?
- Like I said, it’s imperative that you regain the confidence you’ve lost. Instead of investing like you normally would, wait patiently for a golden opportunity, one of those investments that have a 95% chance of working out. Making some money (no matter how little) will help you rebuild your confidence.
On the other hand, booking a large profit is a totally different feeling. The thrill, the excitement… Here’s what you should do.
- It’s a common mistake among investors to become overconfident. Overconfidence leads to arrogance which leads to disaster. That’s why after every successful investment, I like to take some time to let the excitement wear off. Don’t jump right back into the markets – overextending a position can lead to disaster.
- Now comes the hard part. Ask yourself (honestly) – did I make money because I was lucky, or because I was right? How do you tell the difference? Before you made the investment, you should have a list of reasons explaining why you believe this investment would work out. Now, count the number of reasons you wrote down that actually did happen. If more reasons on your list didn’t happen than those that did happen, than you were probably lucky as opposed to skillful.
- Invest more heavily than you normally would when you’re on a winning streak. As they say “winning begets more winning” because you’re more confident about your decisions. Second-doubting is detrimental to successful investing.