Investing with your head, not your heart
Veteran investor Warren Buffett, in the preface he wrote for the fourth edition of The Intelligent Investor by his mentor Benjamin Graham, tackles the issue of emotions in investing: “To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.”
John Bogle, the founder of the Vanguard Group once remarked: “If I have learned anything from my 52 years in this marvellous field, it is that, for a given individual or institution, the emotions of investing have destroyed far more potential investment returns than the economics of investing have ever dreamed of destroying.”
The old cartoon character Pogo famously commented: “We have met the enemy and he is us.” Pogo could well have been describing investors who can be their own worst enemy with emotions betraying sound financial advice and judgement.
Recently, a caller on Talk Radio 702, talking about the suspected pyramid scheme, MMM, said “People should stop commenting from outside, they should come inside first. The problem is that most people don’t understand the ideology of MMM. I am invested in MMM. My mother is also invested. We believe in the ideology of MMM and we get our 30% [return] per month.” The “ideology of MMM” – talk about emotions!
As a certified financial planner, I believe that one of the most valuable lessons I can impart to investors is making them aware of their emotions when investing. An investor, blind to real dangers of their emotions when investing, would soon be a money-losing investor!
What can investors and financial advisors do?
Emotions turn rational investors into irrational investors. Emotions in investing are the typical downfall for most investors – they can blind them to reality. One of the financial advisers’ key roles is to help investors separate their emotions from reality and steer them on the path of rational investing to avoid emotions jeopardising well developed, diversified long-term financial plans.
Good financial advisers assist individuals in developing financial plans that incorporates investor’s values, needs, and wants in order to reach their goals.
One of the things investors should strive for is those in times of tough financial conditions and market turbulence; reason, discipline, and objectivity triumphs over emotions. Financial advisers can help investors, especially those new to investing, deal effectively with their emotions by making them aware of the emotions they are likely to experience.
Examples of common investing emotions that lead to mistakes
Euphoria – The delight of asset prices going up day after day or getting 30% per month from MMM makes success seem self-perpetuating.
Fear – When an ugly day (or week or month) brings falling market prices, an investor can be tempted to sell everything and “go to cash,” missing an opportunity as the market rebounds.
Overconfidence – In a rising market, an investor may believe his or her own superior abilities are causing the gains. It is easy to ignore warning signs or the need for caution. This is so true even for “investments” like MMM.
Denial – An investor watching an asset drop in price may be reluctant to sell and recognize a loss. Selling a depreciated asset goes against an emotional tendency not to admit failure.
Greed – In any market, the allure of “more” can entice an investor like seeking only more growth in a share without the related risk or more ’30 percents’ from MMM without thinking about the consequences of less people joining the scheme in future.
Conclusion
Ben Graham, the father of value investing, once warned, “Individuals who cannot master their emotions are ill-suited to profit from the investment process”
Read more about how you can save on your child's extra-murals.
About Us
Popular Posts
-
Why would you want to use a dictionary To check to spelling, plural, noun or pas tense of a word. You might also be able to see the sy...
-
Research shows that the correct movement wires a child’s brain for learning and when paired with music these connections are strengthened...
-
Power on Rub the indentation just below the collar bone in line with the left eye. This move re-establishes the electrical flow via the ...
Recent Posts
-
Why would you want to use a dictionary To check to spelling, plural, noun or pas tense of a word. You might also be able to see the sy...
-
Research shows that the correct movement wires a child’s brain for learning and when paired with music these connections are strengthened...
-
Power on Rub the indentation just below the collar bone in line with the left eye. This move re-establishes the electrical flow via the ...
Labels Cloud
Tiaan Lötter
Teacher
Tiaan Lötter is a digital learning enthusiast and Google Certified Innovator. He has a background in Public and Private Secondary Education teaching Afrikaans as a first additional language. Through his teaching, he strives to use technology in his lessons in pedagogically valuable methods to engage students in learning opportunities. He presents at summits, conferences and workshops on the integration of digital technologies into education. He believes failure is a step to success and that all teachers are superheroes. Education 2014 Google Educator Certification 2013 Google Certified Teacher 2012 Post-Grad Certificate in Education 2012 Post-Grad Certificate in Editing (English) 2009 Post-Grad Certificate in Pension Fund Law Post-Grad Certificate in Advanced Company Law 2008 B.Com Law (Economics major) 2003 Grade 12 / Matric (National Senior Certificate) Skills
- • Geek-level computer skills on Windows and Apple Mac.
• Excellent education and technology integration skills regarding Apple Apps and Google Apps For Education using pads/tablets and macs/computers.
• Training in the context of professional development regarding the integration of technology in teaching.
• Training provided:
o Google Apps for Education: Chrome and Extensions / Google Drive and Extensions / Google Sites
o Augmented Reality (Setting up and using Aurasma and Daqri apps)
• Compiling training / educational material in the context of a classroom and professional development.
• Notably:
o Wrote and contributed to grade 9, 10 and 11 Afrikaans First Additional Language textbooks.
o Developed poetry resources across multiple platforms like Prezi, Keynote and Google Drive Slides.
o Developed language in context resources using Keynote.
o Developed prose resources using Aurasma's augmented reality.
o Following creationist theory with learner work.
• Attended Google Educator Group Leader training workshop.
• Excellent editing, proofing and translating of English and Afrikaans.
• Excellent written and verbal communication in English and Afrikaans.
Contributors
- Andrea Kellerman
- Anne-Marie Stanisavljevic
- Casha Meintjes
- Celynn Erasmus
- Dr. Jacobus Lieb Liebenberg
- Dr. Melodie De Jager
- Dr. Pieter Kitshoff
- Estelle Barnard
- Frank Magwegwe
- Green Beings
- Jennifer Cosslett
- Joanie Strauss
- Keren Hoy
- Leanne Kiezer
- Lourika Horn
- Marené Jooste
- Marinda Botha
- Marlene Mouton
- Melissa Roos
- Mind Moves
- Monique Theron
- Opti-Baby and Kids
- Paper Video
- Paulus Pilatus
- Phumeza Langa
- Prof. Dr. Ina Shaw
- Rozanne Vincent
- Saurabh Tyagi
- Sister Sonja Sauer
- Stephanie Makhlouf
- Takudzwa Collen Hanyani
- Tiaan Lötter
- Wietske Boon
- Window 2 Learning Excellence