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The Most Important Thing In Investing: Emotional Control

If ever you need a reminder of just how crucial it is for us to control our emotions when investing, then the experience of Stanley Druckenmiller is something you can turn to.

The billionaire Druckenmiller is someone who belongs to the pantheon of investing greats. But, he’s also an investor who has allowed his emotions to lead him astray and commit a very costly mistake.

This is how Druckenmiller explained his folly in a January 2015 interview at the Lost Tree Club (emphases mine):

“So, I’ll never forget it. January of 2000 I go into Soros’s office and I say I’m selling all the tech stocks, selling everything. This is crazy. All this stuff at 104 times earnings. This is nuts.

Just kind of as I explained earlier, we’re going to step aside, wait for the next fat pitch. I didn’t fire the two gun slingers [referring to investors hired by Druckenmiller earlier to specifically invest in tech stocks]. They didn’t have enough money to really hurt the fund, but they started making 3% a day and I’m out. It is driving me nuts. I mean their little account is like up 50% on the year. I think Quantum was up seven. It’s just sitting there.

So like around March I could feel it coming. I just—I had to play. I couldn’t help myself. And three times during the same week I pick up a phone, but I think don’t do it. Don’t do it.

Anyway, I pick up the phone finally. I think I missed the top by an hour. I bought $6 billion worth of tech stocks, and in six weeks I had left Soros and I had lost $3 billion in that one play. You asked me what I learned. I didn’t learn anything. I already knew that I wasn’t supposed to do that. I was just an emotional basket case and couldn’t help myself. So, maybe I learned not to do it again, but I already knew that.”

When it comes to investing, our emotions can become so strong at times that it can override our logical faculties, as it clearly did for Druckenmiller. This tale is all the more stunning considering how accomplished an investor Druckenmiller was at that time (he still is). The key takeaway for me here is that as investors, we need safeguards to prevent our emotions from short-circuiting our logical thinking.

Here are two good ways that I think can be useful for investors to protect them from themselves:

1) Create a wish list of stocks during more mundane market conditions and stick to it

Sir John Templeton, another one of the greats in the investing hall of fame, had made use of wish lists when he was investing. He would make his buying decisions well before a market crash occurred and would keep a list of stocks that he thought were good businesses but priced too highly.

At times, he would even have standing orders in place with his brokers to purchase certain companies if they ever fell to prices that he thought represented great bargains. By having the wish list and standing orders in place, Templeton was able to force himself to make rational investing decisions even if he were drowned by emotions during periods of turmoil in the market.

2) Avoid checking the stock market too frequently

Over the long-term, stock prices are governed by business fundamentals. But over the short-term, it is emotions which rule the day. As such, there can be times when stock prices fall or climb way harder than their fundamentals warrant.

It’s not hard to imagine how some investors may have been enthralled by a stock such as Blumont Group Ltd (SGX: A33) when it was rocketing to the sky back in 2013. From a price of around S$0.06 in August 2012, shares of the company hit a peak of over S$2.40 in October 2013 – in what seemed like an uninterrupted climb – before collapsing by over 90% in value in the space of less than a week.

Blumont Group share pricing
Source: S&P Global Market Intelligence

Shortly before its collapse, the company was valued at a ridiculous 500 times trailing earnings and 60 times its book value. On its way up from a price of S$0.06, investors should have been able to spot that Blumont’s shares had carried extremely demanding valuations even way before it peaked.

In episodes like these, watching the stock market constantly can create unnecessary emotional pressure. When stocks are climbing – as Blumont did – it may create the fear of missing out. (The temptation to jump in at some point between August 2012 and October 2013 may have been too strong for some investors to ignore.) When stocks are falling, there may be strong urges to sell.

“The key organ in your body in the stock market is your stomach, not your brain,” Peter Lynch, the legendary ex-manager of the Fidelity Magellan fund, once said. He’s right.

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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 writer Chong Ser Jing doesn't own shares in any company mentioned.