Investing Without Emotions

cover face In this article, we answer another Foolish question asked by one of our readers. He asked, “How to trade without emotions?”

Here at Motley Fool, we encourage long-term investing in strong companies. Trading is more short-term oriented and such as, does not pave the way for the compounding effects that build wealth. Trading also incurs excessive commissions, which eat into our gains. We will instead answer the question from an investing angle – “How to invest without emotions?”

Emotions here mean fear of falling prices and greed when prices rise. To invest without emotions, one has to have confidence, discipline, and patience. He must have confidence in his investing method and in the business he wants to invest in, be disciplined enough to stick to his methodology and have patience for the stock to reach its intrinsic value.

To prevent fear of falling prices from clouding our judgment, it is paramount that we analyse the company and determine its intrinsic value. When we have determined the value, it is easier to buy when the stock price of the company falls due to macro-economic issues, which may have nothing to do with the company. Even if the company’s stock price falls due to company-specific issues, we can determine if the issue will erode the long-term profitability of the company objectively, as we have thoroughly analysed the company before-hand.

For example, let’s say you bought Osim International Limited (SGX: O23) after analysing it. You bought it at $1 after determining the intrinsic value to be at $1.50. It is grossly undervalued. You intend to hold the stock till it reaches its intrinsic value. Suddenly, the next day after you bought the stock, there was negative news about the economy. The whole world panics and the stock price of Osim, together with many other companies, plunges. Osim’s stock price dips below $1. At this time, would you panic and sell the stock? If the fundamentals are still intact and if the macro-economic news has nothing to do with the company, doesn’t it make sense to buy more? This is where having discipline is extremely paramount. We must be disciplined enough to stick to our investing plans even the economy goes into a tailspin.

Companies like SembCorp Industries Limited (SGX: U96), DBS Group Holdings Limited (SGX: D05) and CapitaMall Trust (SGX: C38U) were selling at beaten-down prices during the recent global economic crisis. However, “what goes down, has to go up” as long as the business is still fundamentally sound. Also, remember that “this too shall pass”. In the past, Singapore’s economy had gone through many shocks like the Asian Financial Crisis, SARS and global economic crisis but has recovered from all of them. If a potential investor was convinced of their businesses during the downturn, he would have been disciplined enough to buy when most were fearful.  Warren Buffett’s quote of “Be fearful when others are greedy and be greedy when others are fearful” rings true here.

Knowing the intrinsic value of the company also prevents greed when prices rise. For example, if the price of a company rises to $1 from a buy price of $0.70, with the intrinsic value at $1.20, we would hold on to the company as there is still value in the company. We would not sell it prematurely due to greed.

Therefore, by researching a company thoroughly and by determining the intrinsic value of the company, one can keep emotions, both fear and greed, out of investing. It sounds easier said than done but it is possible.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.  Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.