Welcome to the world of investing
So many investors have an ongoing love affair with one particular stock. These
investors have a strong emotional connect to such stock or company. For example,
one of my friend has a strong emotional attachment to Tata Steel.
Why?
Simply because Tata Steel was the first stock he ever bought and his investment
doubled in that trade.
Similarly, many investors are emotionally connected to a stock that they first bought.
Likewise, some investors love Maruti Suzuki shares because they own a Maruti car.
People also like buying Tata Global shares just because they like Startbucks coffee.
Some traders trade only in one or two stocks just because those stocks have
generated extraordinary returns for them in the past.
So there are numerous ways in which an investor gets emotionally attached to a
stock. They like the company or its product, then start loving the stock, and finally,
marry into it.
But remember…you should never ever love a stock.
The more you love a stock, the lesser the money it will generate for you.
There is an old saying…’love is blind’. There is a lot of truth in this statement.
Ask your mother how you look?
No matter how you actually look, to her you are the most beautiful/handsome child in
this entire world. This is human nature. You do not say a word negative about a thing
or a person you love. Or for that matter, a stock.
In fact, you will tend to ignore any negatives about that company or stock and
overestimate the positives.
Unfortunately, this a terrible quality to have when it comes to trading a stocks. This is
because a trader let the emotions and biases takeover their investments. And when
emotions take over, mature judgment and sensible trading strategies fall by the
wayside.
Take for example, a trader buys a stock, let’s say…ABC Ltd.
In the past, whenever he had traded ABC, the trade closed in profit. He now feels
that the stock is lucky for him. It wouldn’t be wrong if I say that he is in love with the
stock. Since his success ratio with ABC is 100%, he now has an emotional connect
with the stock.
This time when he entered the trade, it went in his favour again and his confidence
level doubled. He was very sure that ABC Ltd. cannot let him down.
After a few days, the stock slipped lower, marginally, below the buying price. But
since the stock has never generated a loss from him, he decided to hold the stock.
It is time like these when a he quits thinking about cutting losses or preserving
capital and blindly plunges forward, believing or hoping that only good things can
happen in the future.
He blindly marries this stock and is convinced that the marriage will last forever.
What happens next is disaster. The ABC Ltd. trades 60% below his buying price.
What he earned from the stock in the past trades is now all wiped off in just one
trade. That’s what happens when you marry a stock and fall in love with an inanimate
object that can never love you back.
I am sure there are many who are married to stocks like ABC Ltd. in this market –
PC Jeweller, Vakrangee, Reliance Communication etc. The list goes on and on.
Emotional investing is the worst kind of investing. It is the same as blind investing.
Being married to a stock or company means you are using emotion instead of
reason and logic to hold the stock. Emotion is an anathema to smart, intelligent
investment strategies.
So how to avoid falling in love with a stock?
You will have to avoid your emotions coming into your way of investment or trading
strategy. Here’s how you can do that:
1. Lay down a solid set of rules to follow for making investing decisions.
2. Your rules should completely govern how you invest in the markets, but you
should completely govern your rules. When it comes to the decision making
process for stock, follow your rules rigorously.
Happy Investing