11/2013-
Feeling horny? Feeling anxious? Hone in these emotions to achieve an intimate relationship with your Investment Skills
In my years of investing internationally, I cannot help but notice that investors generally become more anxious and excitable only after they have entered into an investment position rather than before.
To the consumate investor, I would always like to do detailed homework on my investments before arriving at a BUY/SELL decision, then relax after entering the investment position while biding time to see how my investment pans out. Instead, I see most investors doing the opposite - most become more anxious and emotional after entering an investment position, rather than before.
Probably it is only human to become anxious easily?
Scientific research in behavioral finance has shown that the amygdalae, almond-shaped group of neurons residing in each hemisphere of our brain are central in processing human emotions and are the instinctual responses to investment decisions. To me, investment decisions should always be separated from the emotional aspect - the best investors are those that can separate the heart from the brain. The former should be engrained in hard core analysis and never mesh together with emotive behavior.
Nonetheless, it is easier said than done - the anxiety feeling among investors is very difficult to control and is subliminal in nature. Fear of the unknown or fear of the known factors turning out wrong will always keep many investors on the edge.
To me, this is Investing 101 gone wrong. Investing should be about hard analytical skills and good earnings modeling. Upon investing, one should keep track of how events turn out, more so on how earlier variables pan out based on everchanging multi-varied factors like the economy, the industry dynamics and the fundamental earnings powers of the companies. One should not panic, even if things do not turn out as earlier predicted as this could prove a good lesson for self-examination as to how earlier predictive skills based on one’s earlier analytical skills turn out.
Instead, many investors would not be able to stomach this lost pride and react instinctively - sell if the asset prices are not going the way as one has predicted earlier. This is very often the poor investment choice as prices in an anxiety-high environment coupled with willing sellers, ,may turn out to be the best investment opportunity.
Another Investing 101 flaw that most investors exhibit is over confidence on one’s abilities. Investors, when polled, tend to expound their wins more than their losses when in fact, a good study of the latter will help more in minimizing one’s mistakes in the future. But alas, most people are just humans - they like something good to talk or boast about, while subconsciously, brushing away the hurt egos that come from their loss choices.
Thus, a good behavioural trait to develop would be to always remain cognizant of what-went-wrong, study how we can be detached from being over confident or even worse, complacent as the market place is always evolving and earnings or economic variables are indeed what they really are - variables. This mean that if you are not right, you will be wrong. The canny consciousness to know when one can be wrong, could actually be the lynchpin for good investing skills.
One reason that I have lived half the time in Melbourne and half the time in Singapore for the past 5 years now is that I do not get suck into what I call the market “entrapment herd”. As in the movie entitled Entrapment starring the lovely Catherine Zeta Jones 5 years ago, scientific research have shown that most research or analysts’ commentaries tend to be synchronise to reaching a mean or common consensus view of a company, its earnings prospects or the fair price of its share.
I find this laughable sometimes as most research reports focus on a slight alteration in arbitrary assigned risk premium of a firm to arrive at a fair value price, which inevitably move it closer to the market mean. There is indeed a herd mentality even among investment professionals not to deviate much from the market mean or herd thinking.
For me, being away in 4-season Melbourne, blessed with great alpine mountains and greenery allow me to go for mountain trekking on days-on-end and in the process, condense and concise my thoughts on the contemporary investment issues of the day. Very often, this process help me to arrive at non-consensus views and escape from the “entrapment herd”.
To many students and participants who have attended my talks at the Invest Fair, by Financial Education Asia or by Shareinvestors, I have repeatedly warn of over priced companies like Liongold, Bluemont, Innopac, Ipco and Asiasons since the beginning of the year. Of course, judgement day arrived on Friday 4th Oct 2013 when SGX designated the securities of Liongold, Bluemont and Asiasons. In the short-time of less than a week, more than $9 billion in market cap was wipe off from these stocks. For those who had jumped instinctively into such stocks where the value is totally mis-matched with the companies earnings, the losses had been catastrophic! So much for the “entrapment herd”.
But can humans rein in our emotions, especially emotions of running prices? Why is that traders do not think and jump instinctively onto companies whose share prices move up? Should this not be indications of over valuations?
Actually, we humans have a mind that can be train to overcome our instincts. We should be conscious of training our prefrontal cortex of our brain, the decision making centre, to overcome our instincts. Admittedly, using the prefrontal cortex to process information in a sea of rushing prices often give way to the instinctive nature of the amygdalae neurons, but this discipline is most important to master to be able to achieve good investment returns.
I have advised most students and participants in my investment classes that when the anxiety plank hits you, take a few steps back to do something relaxing and rejuvenating be it mountain trekking, going for a run or yoga. This time off allows you to re-think and re-process your earlier suppositions and ask yourself if there has been over confidence or “entrapment herd” in your investment decision process.
As much as tracking your own stocks that have gone wrong (so that we can learn the lessons from failure), we must also learn to track our own feelings and anxiety. As humans, we cannot help feeling anxious sometimes or most of the time, but having a good insight of one’s feelings and anxiety will help you buy investments at rock-bottom prices which then make it easier to achieve mega returns, the hallmark of most of my investments.
Being horny is a feeling, but to hone in this feeling is key in successful investment decisions.
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