How to Conquer Greed and Fear to Beat the Market

There is an old saying that the share market is driven by two primary emotions: greed and fear. It stands to reason that if we are able to conquer both emotions, we may stand a chance to beat the market. However, the problem is that the emotions of greed and fear form part of what makes us human.

So, a good question could be what are the ways to keep our own rampant emotions in check if we want to succeed the share market?

Keeping fear in check

The emotion of fear often appears when share markets crash, with petrified investors rushing heading to the exits. We can observe some of this fear happening in the oil and gas industry right now. Bellwether companies like the rig builders Keppel Corporation Limited (SGX: BN4) and SembCorp Marine Ltd (SGX: S51) have fallen by about 29% and 35% respectively since the start of the year (date of writing: 16 December 2015).

When that happens, the fear of losing of our own money can become primal – invoking emotional pain which can overwhelm your logical side. The solution to a fearful environment, as my fellow Fool Morgan Housel points out, could be found the quote below:

Napoleon’s definition of a military genius was, “the man who can do the average thing when all those around him are going crazy.” Same goes in investing.

It follows that if the private investor is able to find a way to the average thing (“invest rationally”) in times of great fear, then the said investor may stand a better chance of prevailing against the malaise of fear. With this in mind, it is my opinion that one of the best antidotes for fear is having cash in hand at times of great fear. Foolish investors may consider gradually putting aside a small pot of investable cash as they go along building their portfolio. This can form their “cash cushion”.

Having cash on hand eases the pain of fear, and may allow the logical side of your brain to take the lead. With that, you stand a better chance of relegating your own fears to the back seat.

Keeping greed in check

On the other side of the coin, greed is an equally dangerous emotion to contain. The seductive emotion of greed can often lead us to take unnecessary portfolio risks in search of big pay-offs that may not materialize. In this case, the private investor may become fixated with images of big piles of money that can overcome our rational side.

Blindly chasing share prices is often the scenario where the emotion of greed can take hold. But, let us also be consistently aware of our own greed when we look at the cheaper share prices that KeppelCorp and SembCorp Marine is offering today.

A possible solution to keeping our greed in check is to institute a cash allocation plan for our portfolio. Foolish investors can consider moderating the pace of cash deployment into the share market to keep our portfolios in check. This can help us from letting greed run rampant in our own portfolios in all market conditions.

As a final note, the astute Foolish investor would note that the SPDR STI ETF (SGX: ES3) – a proxy for the market barometer, the Straits Times Index (SGX: ^STI) — is down only about 4% from its 52-week high. The SDPR STI ETF has historically fallen further before in the past, therefore our portfolio discipline remains important as we navigate our portfolio towards holding for the long term.

Foolish summary

Both greed and fear are powerful emotions which might affect the vast majority of investors out there. It is imperative that we identify our own tendencies, and act towards moderating our own emotions. This means finding the fortitude and the framework that allows you, the Foolish investor, to consistently do the simple, average things (“invest rationally”) and avoid succumbing to environments of greed or fear. Our future portfolios may thank us if we pay attention to these two emotions.

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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 Chin Hui Leong doesn’t own shares in any companies mentioned.