Being emotional is a human trait… it includes loyalty, love, respect, and so on… Emotions are an inevitable part of everyone’s personality. However, it’s advisable to restrict your emotions to your relationships… don’t extend it to your investments. Being ‘emotional’ about your investments is irrational.
We often hear people talk reverently about stocks they have inherited from their parents/grandparents. They will refer to the stock even more respectfully if it has been the reason for making them wealthy. If you even suggest that they sell/reduce their holding in this stock, they will vehemently refuse. For them, this is unthinkable. They are emotionally attached to the stock. Unfortunately, if the company is no longer doing well, they will see the value of their holding shrink but will still be unable to sell.
Similarly, some investors strongly believe that they have the ability to make very good investment decisions. While they could be right, there could also be some investments that may have gone sour. However, their strong belief in their abilities (read ‘ego’) will not permit them to acknowledge a mistake (sell the stock and book losses). There are some investors who blindly follow well-known investors/ stock market gurus. When they read about these ‘gurus’ having invested in a stock, they simply do the same without doing their own analysis of the stock in terms of entry price, risk-return expectations, past performance, promoters’ ability and reputation, and so on. Most often, they don’t realize that these investment gurus would have purchased the stock at a ‘negotiated’ price directly from other investors, or from the promoters themselves (off-market deal). These investment gurus’ risk-taking ability and tolerance may also be higher than that of other investors. And, investment gurus can also go wrong. After all, they are not ‘God’.
When you decide to invest, you need to assess the investment in terms of its risk and reward to match it with your risk tolerance and return expectations. You and your investment needs are unique. You may be more comfortable with only ‘blue chip’ stocks (well-established companies that are leaders in their sector). You may be okay with moderate returns while taking on lower risk. Other investors may have higher return expectations and would, in turn, be willing to take on higher risk. And yet others may prefer young companies with strong growth potential. They would be willing to ride the ups and downs with the company’s journey towards growth.
The moot point here is – unravel emotions from your investment decisions. Your investment decisions should be objective and in your best interest. Remember sentiments are injurious to your financial well-being.
Milan Sangani Milan is a veteran stock market investor and educator on equity investing. Connect with him on email@example.com