The more often you buy and sell shares the more chance your investment nerve will be challenged and your emotions often brought into the frame. History shows us that the most successful investors of all time are those who can hold their nerve, take emotion out of the situation and look at cold hard facts. So, how can you learn to hold your investment nerve in challenging times?
Focus on the fundamentals
You may see wild swings in share prices as a consequence of market conditions, sector conditions or perhaps there is something going on with a particular company. What often start out as “small whispers” can very quickly grow arms and legs and lead to a tanking for a company share price. On the plus side, markets may overreact on the upside and the downside but in the end they will find a balance. Remember, the level of the share price is made up of information in the public domain and that still private.
If the fundamentals have not changed, then why would you consider selling a share? Yes, take into account market rumours and share price movements but also read very carefully any announcements from the company. Have they refuted allegations of say for example a profits warning with cold hard facts?
Take time out
There will be occasions where you can make a significant return going with your “gut feeling” but in general it is better to keep emotions out of your investment dealings. If a company share price is falling, for no apparent reason, do your research, find out what is happening and then take time out to consider the longer-term consequences. If you are uncertain about the medium to long term prospects then it may be time to bail out. However, if you believe that the short term issues are just that, short term, and the medium to long term prospects remain unchanged, there is an argument for holding the shares through the difficult times.
What you will see with any share price subject to positive and negative news is an overreaction on the upside/downside. This is purely and simply human emotion, over buying stock on promising news and overselling stock on disappointment. Akin to an elastic band which is overstretch, at some point the share price will ping back and find the correct level.
Have you got the nerve?
If you feel that your emotions are getting the better of you with regards to your investments then you may need to look at a managed arrangement through an experienced third party. There are many factors to take into consideration such as ego, emotions and in some cases shot nerves. It is not easy riding the highs and the lows of the stock market, holding on to shares which are in freefall and pitting your wits against the market.
Conclusion
There will be a time and a place to quickly dispose of a share which is in trouble, however, this is not always the case. Short-term disappointments, such as perhaps an extended FDA approval period, can lead to some shareholders bailing out. What begins as a small wave of sellers can very quickly turn into a tsunami with new rumours emerging and short sellers jumping on board – trashing the price.
Stick with your wits, stick with your research and if you have quite simply “got the share wrong” then bailout, don’t let your ego stand in the way!