The two emotions that drive any financial decisions are Greed & Fear.
The emotion of Greed is usually the first emotion that you have to encounter in your investing journey.
How it starts?
As a human it is natural to desire to acquire as much wealth as possible in the shortest amount of time and this excessive desire is Greed.
It starts as soon as the process of finding an investment option begins and it tries to control your decision from that point onwards.
With so many mythical short term success stories and sure-shot investing ideas floating around….all promising the financial heavens in a short span of time clouds the judgement of the investor.
The cumulative effects of Greed is very conspicuous in financial markets, where many things are overpriced.
Every investor swayed by Greed contributes to the insanity by following the herd of overconfident investors & experts who believe that no price is too high even if it defies the basic fundamentals of investing.
This get-rich-quick mentality makes it very difficult to pursue a long but fruitful pursuit of understanding the investing options and evaluate them against the basic tenets of investing that says that:
You will invest only in things that you understand and where the prices makes sense.
How you can identity that Greed is affecting your decisions…actually it’s quite simple…just answer some very easy and basic questions
Does this investment sounds too good to be true?
Do you understand how this investment works?
Is it currently available at a price that makes sense?
You know the correct answers already in your mind but this process of reiterating over these basic questions is very crucial and will clear any doubts and reduce any effects of Greed while selecting a particular investment option.
Now coming to the next dominant emotion that is even more powerful than Greed…....which is Fear.
Why Fear is even more powerful than Greed?
The main reason Fear is more powerful is because it remains with you for a longer period of time which can starts right at the moment you commit to an investment.
It also has more capability to decide the degree of damage that can be imposed on your financial well-being if not handled correctly.
It can clouds your judgement to the extent that it can jeopardize even your best investing decisions and make them appear a mistake.
How it starts?
It starts when you start seeing that herd is going in the opposite direction.
The level of damage that Fear might induce can be very devastating.
There are many instances when a person who appears at ease during the drop of price of an investment at a level of 100 eventually decided to sell it at level of 50.
Fear of loss compels the investor to sell at price that is even far below than what is the ‘true’ or ‘fair’ price.
This along with Greed during buying makes a lethal combination that leads to most of the “Buy High and Sell Low” situations.
How it can be handled?
For this you need to change your perspective of how you see the situation.
If a BUY decision had been made with due diligence then the price drop only makes it more attractive investment.
It gives you more chances to magnify your returns if you can control your nerves and train yourself to see the situation with this perspective.
No one summarizes how to handle Greed and Fear better than one of the greatest investor of all time.
“Be fearful when others are greedy. Be greedy when others are fearful.”
-- Warren Buffett
One just have to keep their head when others are losing theirs.