(03) 9020 2905I’ve never had an out-of-body experience. I don’t believe in ghosts. I don’t read horoscopes. And crystal balls are, says me, baloney.
I’m practical. I believe in the real. I accept that weird things happen, though there’s always a logical explanation.
My contradiction is that my favourite show ever was probably “The X-Files”. Aliens, paranormal, conspiracy theories. Go figure. I was probably more Scully than Mulder.
I get that “emotion” often plays a trump card over “rationality”. Fear is a rubbish partner for long-term decision making, particularly investing.
And, damnit, I learned that lesson the hard way, again, recently. The emotional heart overruled the rational brain … and it cost me a fortune.
I gave an “investment” too much leash. I let it wander off course. It burnt me bad. But no pity requested.
However, it was a reminder of the dangers of mixing emotions with investing.
As investors, we try to make logical decisions – value, income, P/E ratios, growth, or many other sound reasons.
Sometimes, we get it very, very wrong. We ignore our processes. The process fails. Or we let market emotions in.
We might be too late into following the easy money. We back ideas based on emotional euphoria. We wrongly trust people who simply didn’t deserve it.
Passive investments, or shares in large public companies, should generally be long-term buy-and-holds.
Not all investments are passive. Smaller companies, or more personal investments (property, and your small business, for example) need constant personal monitoring. Emotions can be strong. (“Give yourself to the darkside, Luke.”)
Keep the following emotions on a leash.
Don’t let losses go unchecked
If it’s costing you money, you’re supporting it. Are you supposed to be supporting this investment (investment property, maybe), or is it supposed to be supporting you? If the losses are running overtime, shorten the leash. If it’s pulling in the wrong direction, offload. Replace. Sell.
Love hath no place
You love this investment and it loves you back? With apologies to the Screaming Jets: “The ones that (you think) love you always hurt you the most”. Love is sentimental. If you love it, it is a dangerous investment. You’ll might forgive the unforgiveable. Harden up your heart, princess.
Investment versus lifestyle asset
Investing is about making money. Sometimes, you will choose to take a lower return for personal reasons (let your kids live in the investment property). Kept these to a minimum. Or accept them as “lifestyle assets”, not investments.
Set KPIs
If it’s an investment that you have to manage, then it has to have a target or comparison. Doing “okay” isn’t enough. How is it performing against its peer group?
Pain threshold?
Playing with shares and property requires acceptance that market volatility comes with the territory. How much can you handle? If you’re sweating and having nightmares, then reduce your exposure.
Buy high! Sell low!
The biggest problem is that the most natural human emotion in investment circles is the most dangerous.
Punters won’t buy assets that are falling in value. Ask any stockbroker. They want rising asset prices. And the more it increases in price, the more people want to buy it. It’s been the most famous recipe for tears in investment history. It started in Holland with them tulips.
Warren Buffett’s first rule of investment: “I try to be fearful when others are greedy and others are fearful”. Well, it’s not his first, but it should be.
I won’t take a loss
Is this the most stupid of all. “It’s already fallen. If I sell now, I’ve lost 10 per cent”. What if it’s likely to fall another 20 per cent? Wouldn’t it be smart to sell at a loss of 10 per cent and then buy back in when it’s fallen that extra 20 per cent? Too many investors ride the escalator down in the hope that it will rise like a phoenix again.
The thing is, my investment that turned sour was something of an out-of-body experience. From a helicopter, I could see the crash happening. And I didn’t stop it … because I loved it.
Once bitten, twice shy. I’ll live. But no investment will ever get that much leash again. As investors, when we’re playing the game for keeps, you have to know when fold ’em.
Bruce Brammall is the author of Debt Man Walking (www.debtman.com.au), a licensed financial adviser and mortgage broker. bruce@debtman.com.au.