Taking the Emotion out of Investing

Even though this is a blog about stock investing, the principles in many of these posts relate and can translate to success in any form of investing in other areas of life:  education, relationships, and so on.  Really, what point is there to becoming a successful stock investor if you can’t also learn things that make the rest of your life better and of those around you?  Although stock investing can be fun and very rewarding once you learn about and understand it, which also involves getting over any myths and hang-ups you might have about it, there are far more important things to life!

Anyhow, this post will discuss a very important factor related to success in anything.  Let’s start by discussing something that many people equate to success, whether or not it is actually a true measure of it:  money.

Money is a most interesting thing.  It is one of the few things that can cause us to experience extremes of emotion, ranging from euphoria on one end to thoughts of suicide or murder on the other end depending upon which financial state you find yourself in.

But a very common thread behind all emotional extremes – money-related or not – is the factor of time.  Whenever one experiences an extreme emotional reaction to something, allowing time to play out almost always results in that emotion becoming less extreme.  The sting of death is the most painful when we first learn about it, but that sting almost always lessens over time from uncontrollable sobs of grief and sorrow at first to moments of contemplative sadness later on, maybe the odd tear of remembrance, whenever we think about that dear one who has left us.

If one is experiencing murderous rage, those thoughts could be reduced to anger or even remorse and repentance if that person has enough self-control to walk away from the situation.  How many deaths throughout history could have been avoided if only a potential murderer would have simply taken a few deep breaths, walked away, and thought hard about the consequences of taking another person’s life?

As the saying goes, “Time heals all wounds”, but that’s entirely because it is the leveler of emotion.  It smooths out the bumps in our thinking by sweeping away the emotional extremes, allowing us to think with more level-headedness and thus more clarity.

In another post, the argument was made that patience is the most important trait that one would absolutely need to be a successful investor, and really to becoming successful in any sort of endeavor, financial or otherwise.  This is also because patience is what one needs to have in order to let time do what it does best:  smooth out the bumps.  It is this idea that forms not only the core of the most successful form of investing in a company’s stock (namely long-term or “buy and hold” investing) but it also applies to investing in your education and training and to investing time and energy into the lives of others, like children and co-workers.  It can take a long time for success in these endeavors and pulling out too early due to being impatient is a key reason why most people only ever reach a certain level of success in their lives – professionally, financially, relationally, and so on.

As the saying goes, “Time heals all wounds”, but that’s entirely because it is the leveler of emotion.

So let’s now specifically relate this to investing, in particular the stock of a company because, after all, this is what this blog is ultimately about!  Of course, success principles applied to one thing can lead to success in others, so use this advice how you wish, but the focus from this point will once again be about investing in stocks.

Let’s start with a bad example first, followed by a good example.  If you have owned a stock that eventually lost you money, you went through quite an emotional roller-coaster along the way.  There was that first excitement and optimism the moment you bought shares in the stock, the curiosity as it might have risen for a time above your purchase price, the moments of anxiety as you began to read disturbing reports about the company and/or industry it’s a part of, then doubts and perhaps even fear when the price started to fall, ending with discouragement and perhaps even depression when you finally realized that you needed to sell before you lost even more money.  (This blog has several posts with advice about how you can avoid such a situation!)

Unfortunately, only one negative experience with just one stock can turn somebody off of stock investing for a lifetime.  Sort of like a person assuming that one bad relationship means that investing in another one ever again is simply not worth the pain.  In both cases, one ultimately misses out on all the good ones out there based upon one solitary bad experience.  Worse, they often decide to blame other factors rather than doing a lot of soul-searching to see if they themselves weren’t the real cause of the problem, thereby missing out on an incredible growth and character-building opportunity.

Unfortunately, only one negative experience with just one stock can turn somebody off of stock investing for a lifetime.  Sort of like a person assuming that one bad relationship means that investing in another one ever again is simply not worth the pain.

Now for a good example.  If you’ve held a stock for a few years and it has ultimately earned you a lot more than you bought it for, you’ve also gone through quite an emotional roller-coaster.  Reaching a good result has meant having to keep bad emotions in check along the way.

A fascinating article from The Motley Fool’s “Stock Advisor” service from September 29, 2016 entitled, “53 Reasons to Sell vs. the Power of Patience” (available only to S.A. subscribers) stated how the *S&P 500 index rose more than 100-fold from 1950 to today, even adjusted for inflation.  Then a line chart was displayed showing this increase in the index but with the most terrible and troubling global events over that period pointing to each dip.  Some of those events included the Korean and Vietnam Wars, the Cuban Missile Crisis, the World Trade Center bombing, AND the recessions of 2002 and 2009 – events that sent many investors running to the exits because the emotional stress was too overwhelming.  (*The S&P 500 index is considered a more accurate indicator of the state of the stock market than the Dow Jones index.)

The S&P 500 index rose more than 100-fold from 1950 to today, even adjusted for inflation.

The point of the article is that each event was one of 53 very smart-sounding reasons to get out of the stock market and sell all your stocks, but a person who held on for any 20-year period during that time would have been well ahead of where they started.

The market has always risen over the long term.  By realizing and remembering this, you can choose to hold firm when most others are panicking during periods of market turmoil.  While other people are on an emotional roller-coaster, you can choose not to be.  You can choose first of all not to make their emotions your emotions in the heat of the moment, but you can also allow the power of time to smooth out the short-term effects of those emotional extremes over the course of several years.  During periods of market turmoil it’s better to shut off the T.V. news and stop reading the financial reports and instead resolve to let time smooth out all those emotional bumps which will eventually go away if you hold firm long enough.  Over the course of several years, any dips will become insignificant blips on the overall chart of a successful company’s stock price.

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