The Motley Fool

5 Deadly Investment Sins: Part 1

Many investors might recognise the next investment sin, anger (or wrath), in themselves. It’s normal to feel frustrated and angry when something goes wrong, and things often go wrong when we invest as the future is unknowable and unpredictable. However, there is a clear distinction between normal anger and sinful anger. When an investor is sinfully angry, he avoids blaming himself for mistakes, ends up making impetuous decisions in the heat of the moment, and tends to view investing as a “macho” competition where aggressive and instinctive behaviour is rewarded.

The idea here is to make use of anger to spur oneself to improve one’s investment process and to reflect on mistakes made. The danger is when such anger tips over into the category of “sinful anger,” which is when we throw logic and rationality out the window. Investors need to know how to manage and control their anger instincts so as to channel that feeling into productive use rather than letting it rampage through our thought process and destroy a well-built portfolio.

Here are some suggestions investors should take to heart to prevent anger from clouding their better judgement.

1. Set up a “mood monitor” for yourself

It’s important to be alert for emotions that may tip over into sinful anger. One method is to set up a “mood monitor,” which is an alert system to let you know if you are having that familiar angry feeling welling up inside you. For example, when you get sinfully angry, you may have a desire for vengeance, and this ends up clouding your investment decisions as you feel you need to “take revenge” on the market.

One good suggestion is to wait ten days before taking any action. The cooling-off period allows you to calm down and brings more rationality to the table.

2. Analysis

Even while you may be furious at yourself (or someone else) for a bad mistake made, it’s important to be able to analyse what happened. Ask yourself if it was a failure to do proper homework or due diligence, or just bad luck that caused the investment loss. Was the decision made in haste without due consideration for the risks, or were the risks glossed over because you wanted to move too quickly? If the brain has an opportunity to analyse the situation, it might result in normal anger instead of sinful anger.

3. Watchful waiting

Often, when an investment’s share price goes south, you may feel an immediate need to rid yourself of the investment because you feel defensive and angry. Watchful waiting is a better response, here, and you need to ask yourself a few key questions in order to deflect the anger away: What was the original thesis for making the investment? Is it still valid? Were you acting on a hot tip, or was the investment made after careful due diligence?

Don’t let your temper flare up

These simple questions should calm you down and help you reassess the investment to see if it may still be attractive at a lower valuation. This helps to dissipate the anger and makes you more calm and rational, which is important when it comes to investment decisions involving hard-earned money.

The next part shall focus on how to stay cool even when we encounter situations where our tempers may easily flare up.

Worried about the overall state of the market? Do you know the 1 thing you should never do in the stock market? The Motley Fool Singapore’s new e-book lays out a plan to handle market crashes, details the greatest advantage you have as an investor, and looks at decades worth of market data to bring you the smartest insights on investing. You can download the full e-book FREE of charge—Simply click here now to claim your copy

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.