“The hardest part of being a successful investor is keeping our emotions in check”

By: Allan R Kirby

Unfortunately there is no magic formula for becoming a great investor. What I have learned is that it takes time, patience and lots of homework to become reasonably good at developing a well-diversified portfolio. When the markets are moving higher, individual investors like myself will become excited, thrilled and at some point even exuberant over our investments. We begin to feel incredibly intelligent and smile with glee at our gains. However we tend to forget that Mr. Market is not always as forgiving as we think. There will be times when our stocks get crushed and that’s when the fun stops.

Yes that is correct, conventional wisdom says you should not look at stocks when the market goes down because a downturn is normally a temporary thing. Ironically if you’re a retail investor such as myself, you will do the complete opposite and end up glued to your positions as much as possible. This of course results in you going through a whole range of emotions during a downturn such as:

Anxiety — As your stocks go down, you begin to feel a little anxious about not only where the market is going but what you should do with your stocks. Should you buy, sell or just sit there. You’re still not sure what is going on and you’re still clinging on to the hope that everything will work out.

Fear — This is when you start to realize things are not getting better. Your not looking at a one or two day event, it’s going on longer than anticipated. You begin to see losses accumulate or profits decline. This is when I usually lose my smile and start to feel a little stupid for not selling so quickly.

Panic — I have been here so many times, you’re watching the markets tank and seeing your money go down the toilet. It’s at this point you begin to question your abilities as an investor and start the “Would have, Should have, Could have” game. You then begin to try and figure out what to do Sell or hold? You’re no longer thinking of buying.

Capitulation — This is when many people just give up and sell their stocks. It’s usually the low point and it can be difficult to get through. Basically logic goes out the window and people start following others, getting rid of stocks wholesale. You just want to preserve something, if anything that is left with your investments. Sleepless nights and possibly anger over those who keep selling those perfectly sound stock! Worse you may sell only to see your stock fly back up to where you originally bought it, you’re now stuck with a loss and nothing to show for it.

If you plan to be an investor in stocks over the long term you need to find a way to cope with the ups and downs of the market. You will always get emotional when you buy individual stocks you thought were going to be a great investment only to see the stocks tank. It can be a horrible experience and one that we all will go through at some point as an investor.

The art of bad timing

I have always been told to have cash on hand so I can buy into a downturn or to average down a particular stock that I own and like. Excellent advice, but there are problems with this.

1. You never know when the bottom will occur so I have on many occasions used up most of my cash to average down during a market meltdown only to see those stock fall further, never really buying at the bottom.

2. It’s the same when I have opened a new position into a declining stock. I have bought into a new position that has already decreased significantly from its high only to see it go down further than my average cost.

To be honest this has happened so many times in both cases that I have lost count and it has made me feel like the dumbest investor ever on more than one occasion. I did everything right, reviewing the company’s quarterly and annual conferences, meetings and earnings releases to analyst opinions only to fail to buy at the bottom. More on this later.

Terror hits the streets

Unfortunately this is also common with market meltdowns, the doomsayers come out and highlight the end of the stock world. It adds terror to the streets and makes it that much more difficult to be rational especially when you hit the fear, panic and capitulation emotions. This of course heightens your fears to the point of making stupid decisions. Sometimes I swear the analyst purposely put out negative opinions on stocks just when they are at their weakest.

Coping with meltdowns

I have read so much on how to cope during stock downturns, especially steep market meltdowns, but most of the advice does not work and no matter how much I try, I am still unable to keep my emotions in check. Although I cannot change my emotional state I have found ways to cope during meltdowns which are:

1. Stay focused and patient and average down.

2. Do not sell stocks based on emotion, no matter how hard it is.

3. Do my homework and understand what is going on.

4. Never beat myself up for things I did not or could not foresee.

The final thing I have learned is to ignore the doomsayers! They seem to get a free pass every time there is a serious market pullback. These doomsayers can and will weigh on your ability to cope. What I have found is that by keeping my portfolio diversified during market meltdowns will help, however sometimes all sectors get hit. That means no matter how well your diversified, big pullbacks can and will hit your entire portfolio.

Patients is a virtue over the long term

Like many investors, I have gone through all of the emotions when dealing with a market meltdown. Trust me it’s not fun, even when you think you’re prepared for it, you will still find it difficult to stay level headed. You learn quickly that you cannot control the stock market or the destiny of your stocks. However patients has yielded positive results over time for almost all of my investments where I averaged down or bought into a new stock at a low price point. Of course I have never been able to perfectly time the bottom of a stock but the strategy works. This was a valuable lesson, averaging down works, I may miss the bottom but in the end my investment made money.

No Magic Solution

History teaches us that over time if you pick a well-diversified set of stock you can come out ahead, which is all we really want. It’s natural for many investors to get anxious when taking their hard earned money and putting it into stocks. If the stocks go up, great! We feel good about ourselves however it’s not so easy to keep our wits when everyone else is panicking, selling and providing doomsday scenarios.

The hardest part of being a successful investors is keeping our emotions in check, which can feel impossible during a market meltdown. Unfortunately I have no magic solution that will work with everyone. Truth be told each and every one of us must find our own way to cope in order to succeed. This is no easy task because we usually only search for ways to cope during a meltdown, by then it may be too late. It can be a hard lesson for many of us who chose to invest in the stock market as a way of investing our money.

This is a MySmallBank.com blog written by Allan Kirby, who writes and produces Personal Finance and Money Management articles and videos along with My Success Magazine.