How to Avoid Emotional/Impulsive Investment Decisions

Introduction

The stock market is one of the most volatile markets out there. You can potentially buy or sell a stock position worth thousands of dollars with a click of a button. Within that, there is the huge opportunity of buying and selling whenever you want to, making your investment liquid. However, this opens the door to emotional/panic buying or selling, which could potentially make you lose all of your invested money. 

According to Investopedia (2020), Investment decisions based on fear or greed is the main reason why so many people are buying at market tops and selling at market bottoms. During the 2007-2008 market crash, the net fund outflows peaked at the market bottom, creating overly discounted investments, yet fear was dominating the hearts of many to reinvest back. So, understanding how to avoid emotional decisions is essential to become a successful investor.

There are many articles out there that talk about risk tolerance and dollar-cost averaging as ways to reduce emotional investment. However, as much as I understand their importance, I don’t think these will solve the problem from its roots. I personally use a 3-step method that allows me to ensure logical investment decisions, 

Understand 🡪 Standardize 🡪 Write it down

Understand Your Strategy

This sounds relatively simple, but it is the foundation of everything. Always ask yourself when you’re investing in a company, “Am I deviating from the type of companies I am good at studying and investing in?” If the answer is yes, then unless you have a written down reason with all of the numbers that confirm your thesis of why it’s a good buy, then you might be FOMOing (Buying the stock because of fear of missing out on fast and easy profit).

It is not wrong to invest in a company that doesn’t follow your strategy if you see an opportunity. I personally have one dividend-paying stock in my portfolio when I mainly invest in growth and GARP stocks. However, not only I did a proper research, backed up with numbers, about the company, but also, I made a YouTube video about why it’s a good buy to ensure that I didn’t miss anything.

Standardize

If there is only one paragraph you want to read in this whole article, please make it this one.

 You can drastically reduce the chance of panic selling or buying by simply standardizing the way you research the companies you want to invest in. Make an excel sheet model where you can write down all the numbers you usually look at in a company and a section where you write down the advantages and drawbacks of the company’s business, management, sources of revenue, etc. By having that excel sheet model, you can simply peak at it anytime and remind yourself why you bought the stock in the first place and where do you see it in a couple of months’ or years’ time.

By having one standardized sheet of all the stocks you research of the same type, you can also start easily comparing different companies within a blink of an eye and make better investment decisions to maximise profit. 

Write it down

This may sound intuitive, but write things down. Even simple things that you may think you’ll remember, just write it down. The process you follow and the kind of numbers you look at when studying a company, write it down. It is better to have things written down rather than relying on your memory because this way you can ensure you won’t forget anything.  

Conclusion

In a nutshell, this is all about making the numbers and research make the decision for you and not your instinct, and by having a written standardized way of doing your research, you will need less energy and time to know why you’ve invested in a company when you want to review your purchase decision after a period of time.

This blog was written by Muhab Hasan, a young Popular Investor who became passionate about investing at the age of 12 and is now a Mechanical Engineering student at one of the UK’s top universities.

Get To Know Muhab Hasan

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