When it comes to investment there is a big difference between emotion and a gut feeling. Understanding and appreciating the difference between these two emotions could literally make or break your investment returns going forward. So, how should you treat emotions when it comes to investment decisions?
Learn how to read the markets
I was going to say that figures and statistics are the key to valuing a company but you also need to appreciate market movements. As we have mentioned on numerous occasions, if you think of the stock market as an information exchange, as opposed to a place where you buy and sell shares, you will begin to understand the process.
Public information
There is a big difference between public information and non-public information (insider information) but both together will dictate the direction of any share price. Very often you will read public information, available to the masses, but the share price may well move in a different direction than you might have assumed. In many ways this is driven by insider information which has maybe leaked out of the company or one of their advisers.
Inside information
If you look at statistics and figures on their own they will give you an idea of the historic health of a company at one point in time. They will not show you what the company is worth tomorrow, what it was worth last year but they give you a basis on which to calculate a “fair valuation”. Insider information could be anything from a financial crisis, lost contract, takeover approach or something else. It is obviously illegal to deal on inside information but as soon as this information is in the public domain, it is legal.
Don’t fight the market
In many ways investing in the stock market is a simple process made very difficult by participants. For example, on numerous occasions you will see a share price rising ahead of a company’s interim or full year results. The chances are the figures have leaked but have not yet made it into the public domain. A word of warning, sometimes misinformation can be leaked and rumours can be reinvented and reshaped by individuals and other parties.
Weight of investment funds
A share price is hugely influenced by supply and demand. Thereby the weight of investment funds leaving or entering a particular company will have a huge impact on the share price. If there are large sellers of a stock this will depress the share price and alternatively where there are significant buyers of a stock this will push the price higher. In the short term, prior to official confirmation of a particular situation or developing scenario, a rise or fall in the share price may be “overdone”.
The share price will find its “balance” in due course but a short-term spike on the upside or the downside is not uncommon.
Summary
Perhaps the best piece of advice for those looking to maintain a balanced approach to their investments is not to have a favourite company and treat each share as an empty box. Therefore, you are simply buying and selling boxes based on their market value. There is no favoured product, no favourite service as you are simply buying and selling boxes. How can you get emotionally attached to a box?