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Stock Market Education Emotional Rollercoaster Article - April 2005

emotional rollercoaster If you’ve ever been on the Big Dipper rollercoaster, you will remember screaming at the extreme highs and the thrill as you came rocketing out of the dips. Investing in the stock market for most people who don't really know how the stock market works, can be an ‘emotional’ rollercoaster ride – creating exhilarating highs and devastating lows. always being right You’ve heard the old joke, “When I married Mr Right, I didn’t know his first name was Always!” In life and in the stock market you can’t always be right.  Imagine, how would you feel if you bought a stock (expecting to make lots of money) but instead it drops in value? Firstly, no one likes making a decision that results in any money being lost.  The quantity of money lost will have a bearing on the intensity of your feelings.  If your loss is smallish, your feeling may be of disappointment that your expectations were not realised. If the loss is large, much stronger feelings will be present.  a vicious cycle What is your natural reaction to pain? Well, you probably want it to stop and quickly! The more intense the hurt, the faster you take steps to make it stop or at least ease the pain.  Losing money in the stock market can be a very painful experience. Educated investors can tell very quickly if a investment has gone wrong, and know how to sell their stock and clear their heads.  Those who are uneducated in the stock market, go into denial – they don’t or simply can’t admit anything is wrong. They prefer to go into 'hope & pray' mode … doggedly hold on to the shares waiting for them to go back up, so they can eventually be right. If the stock keeps going down, the once faithful investors get to a stage where they can no longer deny there is something wrong. Their hope turns into disappointment, then slides down the slippery emotional scale into frustration, anger, helplessness and despair. These people who are desperately holding on to a falling stock finally can’t stand the pain any longer and sell. Unfortunately, they usually sell out at the very low and when the stock starts to move back up again, they are confused and too scared to do anything in case they make another mistake. You can see how easily a destructive habit of ‘buying high and selling low’ can be established and fostered when an uneducated investor’s emotions are all mixed up.

	beware the 'gut feel' method When you buy a stock, you do so because you have a strong expectation that it will move up. Unfortunately, a large percentage of people enter the stock market based on flimsy tips and rumours or worse still,  a vague ‘gut feel’. The Gut Feel Investors wade confidently into the market, like John Wayne into a wild west saloon, rarely giving a second thought to what they will do if the stock goes down. The gut-feel method is very unreliable!
survive & prosper To survive and prosper in the market you must get off the emotional rollercoaster! Staying on the ride will only bring losses. What can be done to prevent this vicious cycle?  Well, the first thing to recognise is that in the stock market your emotions will be heightened far above normal levels and the type of emotion is likely to change rapidly – excitement can turn to despair in a flash. The second step is to plan how you can reduce the effect your emotions will have on your investing.  Thirdly, when things go wrong (as they sometimes will), take a breather from the market. It is a very healthy practice to step back and look at the bigger picture.  Once you have regained your composure and confidence, you can re-evaluate or move on to another stock and begin your analysis afresh. Desperation and impatience are a lethal mix in the markets! Emotions make us see things out of balance. And, when we are off kilter, we aren’t able to exercise good judgment and discipline.
applying appropriate strategies  A wise investor will always be ready to take the appropriate action depending on the market conditions. In other words, they have and more importantly, follow a well-defined trading or investing plan. This means they know how to manage their money and their risk. They have an entry strategy, a clear profit target, they understand what they are risking, they know the level where they will start to make money and they have a clearly defined exit strategy. Without crystal clear rules, emotions overpower logic. Without rules, you are soon back on that emotional rollercoaster with your ego and self-esteem in your mouth. After a loss, uneducated investors often feel totally dejected and think “I’m such a loser, a failure!” While those who are educated and have a plan, are much less emotional and less likely to hurt themselves. They approach the market more objectively. They use fundamental or technical analysis or a combination of both, to determine whether they should buy, sell or wait.  Of course, educated investors know that not every trade is going to be a winner. They have tested and are confident in their investment plan or trading rules. And because the result is not closely connected to the individual investor’s ego, it makes it easier for them to follow the plan. emotional control As Warren Buffet wisely said, “a person who can’t manage their emotions, can’t manage money”.  At Wealthwise, we too believe that success in the stock market only comes when you have a plan that supersedes your emotions! do you need a plan & clear rules for investing? If you need a plan and clear rules for investing or trading in the stock market, register in the next 'Invest for Success' Workshop, presented by David Novac.
Wealthwise Education Pty Ltd PO Box 6O94, Pymble NSW 2O73, AUSTRALIA T: 61.2.9488.9900 F: 61.2.9449.2499 E: info@wealthwiseeducation.com W: www.wealthwiseeducation.com   © 2004 Wealthwise Education	new DVD ... 'building wealth in the stock market': 2 DVDs with over 2 hours of David Novac showing you step-by-step how to: combine technical and fundamental analysis to identify financially healthy companies with explosive growth potential the DVD is filmed professionally in a studio.  You will find the material is presented in a clear, structured manner.  It is more than a perfect refresher for TFS Graduates as it also covers new material to clarify and enhance your present knowledge. Click here for more information Investment:  $595