“No passion so effectually robs the mind of all its powers of acting and reasoning as fear.” Edmund Burke, 1729 –1797
Perhaps you can remember a time in your life when you climbed a tall tree, stood at the edge of a cliff, or leaned against the railing on top of a very tall building. I’m sure you’ll also remember your feelings when you looked down. Maybe you felt scared, a little dizzy or absolute terror. You may even remember feeling a bit sick in the stomach. If you’ve been on a roller coaster ride, that same feeling of fear hits you as the carriage inches its way over the peak and plummets down into the dip accompanied by the screams of your fellow passengers. As you hurtle around the corners and race through the loops, your stomach seems to have trouble keeping up with you, until the carriage slows down to return to the disembarkation point.
The emotion of fear can also affect you and the financial markets as a whole. In the same way that most of the passengers scream as the roller coaster carriage plummets down the dips, investors bail out in increasing numbers as the markets experience a downturn. If you observe the roller coaster ride, you’ll notice that the screams get louder and increase in number, as the ride progresses and even some of the ‘cool cats’ are drawn in by the behaviour of the crowd.
Then there are the types who hop off the ride and race around to rejoin the queue for another hit, and then another. They just can’t get enough! They love the thrill of it all and want to be part of the action for as long as possible. You could almost say they are greedy for more.
Investing successfully is often a fine balancing act between the emotions of fear and greed. Not only do you need to be aware of your own emotions of fear and greed, but you also need to be aware that the investment markets as a whole are driven largely by these same collective human emotions.
When the market is strong and bullish, market sentiment is positive and those busily buying, are convinced that whatever price they buy at, they will easily be able to find a buyer who will pay them more than they have just paid. Greed drives this type of market as well as the fear of missing out on massive profits. When positive market sentiment abounds, it is said that the bulls are pushing the market up. When a bull charges, it charges ahead boldly.
On the other hand, a bear market is used to describe a falling sharemarket because it’s like a cranky bear with a sore head. A bear market is characterised by an atmosphere of doom and gloom, statistics and comments indicating declining business and investor confidence and a feeling amongst investors that if they don’t get out now, they might ‘lose their shirts’. Just like the roller coaster plummets down into the dips, when the market falls, it usually does so very quickly. That’s because panicky investors want to get out of the market before it falls any further. It’s the fear of loss that drives peoples’ decision to sell.
If you take a moment to reflect on your own behaviour, you will observe that at times you have been strongly optimistic towards investment and other opportunities, while at other times you have been far more cautious, perhaps pessimistic and absolutely afraid to make a move. Fear is such a strong emotion that it can literally paralyse you and immobilise you to such an extent that you take no action at all.
If you cast your mind back over time and think about market crashes in either the property sector or the sharemarket, you will probably agree with me that when the market experiences a downturn, it is much quicker and much more severe than when the market is moving up. This demonstrates that fear is a stronger emotion than greed. Once again, it’s a bit like the roller coaster which is slowly and steadily winched up to the peak.
Now take a moment to think about what makes you feel either optimistic or pessimistic. I’m sure you will agree with me that the major factor influencing your emotions is what other people say and what you hear and read in the media. Generally it is other peoples’ opinion about what might or might not happen. The more knowledgeable and/or credible these people appear to be, the more likely you are to take their opinions seriously.
Can you imagine what your investment decisions would be like if you were totally shut off from outside influences and you based your decisions just on the factual information about a company or property rather than on other people’s opinions? Can you imagine if you would lock yourself away in a room with your calculator and computer, all of the necessary statistics, the profit and loss statements and balance sheets and any other data you require? Can you imagine how much easier your investment decisions would be if you systematically analysed the facts without all the noise of opinions and interpretations around you? Provided you have an effective system of analysis, it would be a whole lot more accurate and reliable than listening to other peoples’ opinions.
An example of someone who invests according to facts, is the legendary investor Warren Buffet. He takes plenty of time to analyse companies before he invests in them. Before he takes a position in Coca-Cola, Gannett or Gillette for example, Buffet may spend months getting answers to every question he can think of. But once he invests, he does so with full confidence. And he sticks with the investment.
When I was studying at university I was a keen scuba diver. Many of my university holidays were spent living and diving on uninhabited islands on Australia’s Great Barrier Reef. Generally our diving expeditions were for periods of two weeks at a time. Now, when I say these islands were uninhabited, I literally mean there were absolutely no facilities on these islands and everything we needed for our survival and comfort had to brought with us, including water, shelter and food. There were no radios, newspapers and televisions. Our nights were spent around the campfire, usually with a bottle of port because we had no way of keeping the beer cold on a tropical island.
When we came back home I was often asked things like: “did you hear about such and such an incident? Or, “did you hear that XYZ Company had collapsed?” Of course I hadn’t, and it really didn’t make any difference at all to my world. It actually made me realise that some of the short-term events that occur, that we often think are so terribly important have very little influence in the long-term and in the greater scheme of things.
There are often short-term hiccups, but they generally don’t dramatically influence the long-term trend. It’s a bit like the captain of the ship who keeps his sight on the horizon rather than looking at the waves in front of his vessel.
When you are investing, you need to focus your sights on the long-term goal. You need to observe the trend and not be blown off course by a few short-term aberrations in the market. You need to draw your own conclusions without relying on the good opinions of others.
The reason we so often listen to the opinions of others, is that it gives us comfort to know that we are not alone in our beliefs. None of us like to go out on a limb because that represents danger to us. We like to think that someone else thinks the way we do. After a while however, we stop thinking for ourselves and turn instead for guidance to the opinion leaders. If those people are optimistic, we are more confident and optimistic ourselves. If they express pessimistic sentiments about the markets, those emotions quickly cause us to doubt the wisdom of investing and we hold off.
Interestingly, the most successful investors are the contrarians. They do the opposite of what the crowd does. They invest when everyone else thinks the sky is falling in and they take profits when the markets are booming.
They do their due diligence or market research based on the facts and they ignore the opinions of others. They work according to a tried and proven investment formula and they follow their own strategies regardless of what others think.
The best strategy of dealing with your emotions of fear and greed is awareness. When you are aware of what is going on in the media, you can choose to ignore it if it is contrary to what you know you should be doing. When you are aware that you are being influenced by the opinions of others, you can take time out to analyse the facts and proceed according to your proven strategy.
Doing your due diligence thoroughly and focusing on the facts, will help you build confidence in the validity of your decisions.
About Hans Jakobi
Hans Jakobi is an educator, author and investor. He is the author of six best-selling books including,
How To Be Rich & Happy On Your Income which is available at:
www.supersecrets.com and the presenter of the Super Secrets® to Wealth do-it-yourself real estate home study course. Join Hans Jakobi’s FREE Super Secrets® Online Newsletter
© 2002 Hans Jakobi. All rights reserved worldwide
Webmasters: Add this article to your site
