Greed & Fear – Your Worst Enemies

 

If you have been keeping up with my blog you will know that I have been advocating the “buying and holding” of individual stocks. This type of strategy really only requires you to do one thing:

Buy a company’s stock that has a promising future for a fair price and hold that stock for 5-10 years (or even decades).

Eventually, the goal is to sell that stock for much more than what you had paid for sometime in the future. Simply put, “buy low and sell high”. Easy enough, right?

Putting the theory of “buy low and sell high” into practice is far harder than it seems thanks to two little words called:

Greed and Fear

Greed Will Cause You To “Buy High”

Let’s focus on greed first. It is human nature to not want to miss out on great investment opportunities. It is really quite easy to be caught up in the hype of a stock after you have heard about the performance of that particular stock. However, it is more important to see where a stock is headed and not be so concerned with where it has come from.

Take the ever-popular FAANG (Facebook, Amazon, Apple, Netflix, Google) stocks for example. These stocks are some of the most popular growth stocks that you can buy today. There isn’t a single day that goes by where you don’t hear about these companies or use one of their products. There are a lot of good reasons to buy stocks that have huge growth potential, but the problem with these types of stocks is that they are far more expensive than the overall market (in regards to price/earning ratios).

Many people will buy a stock precisely when it has reached an all-time high, which is fine if you plan to hold that stock for 5 or more years, but is a terrible idea if you are unable to handle the big swings a hugely popular growth stock typically has. Just take a look at Netflix (NFLX).  Netflix stock has had drops as large as 36% in a very short period of time.

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When a stock has increased dramatically over a short period of time, that is precisely when the stock is at it’s most risky state. Many investors will be greedy and buy stocks at the peak – hoping just to get a piece of the action.

 

Essentially, greed causes us to make irrational decisions since humans are susceptible to FOMO.

Don’t let greed control your investing decisions.

Fear Will Cause You To “Sell Low”

Greed by itself is not a terrible thing when it is alone. However, when greed is accompanied by fear, there is a disaster waiting to happen.

The only thing worse than a greedy investor is a fearful one. Fear will drive you to sell your investments at precisely the worst possible time. The fear of losing a significant amount of your money will lead you to just that – losing a significant amount of your money.

Take the above example of Netflix for instance.  It is very easy to have wanted to sell Netflix stock after that 36% drop in their price, but history shows that you would have made a huge mistake if you did sell. If you sold NFLX on February 5th, 2016, then you would have missed out on the huge 139% gain just a year and a half later.

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If you truly believe in a company’s fundamental business and financials, then there is no reason to worry about a drop in the stock’s price. The price of a stock is just a reflection of what the market values it at and does not reflect the true intrinsic value of the underlying business.

Besides causing you to sell stocks at lowest lows, fear will also cause us to avoid taking big bets on “risky” assets. Fear drives us to invest in index funds and mutual funds instead of buying Apple (AAPL) – even though more than half of us own iPhones. Some of us are so afraid of the idea of managing our own money (because no one ever taught us how) that we hire a financial advisor to take on the daunting task.

Fear is what paralyzes us from even investing in the first place. Countless people have been burned by the stock market and have sworn off it for life – simply because they are scared of getting burned again. If you don’t invest, then you will never be able to accumulate wealth that can outpace your cost of living.

Not investing because you are afraid of losing money is one of the worst ways to live, because guess what… inflation makes you lose money every second of every day of your life.

Don’t let fear control your investing decisions.

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Control Your Emotions – Think Long Term

Fear and greed are best friends – and they can cause you to lose a lot of money.

Greed will cause you to buy a stock at precisely the point where the stock price is ready to come down. Fear will cause you to sell a stock at precisely the point where the stock price is about to go up.

Invest with the mindset that you want to hold that stock for 5 or more years. Committing to a long holding period will guarantee you avoid the mistakes that emotional investors make every day.

As much as I try to avoid these two words – greed and fear – we are all human and are fallible. I was greedy when I bought the hyped up IPO of ETSY.  Fear then caused me to sell at a loss and even worse caused me to stop investing for a couple of years. Avoid these mistakes, study the stock you are interested in buying, and learn to control your emotions before you hit that “trade” button on your browser.

The one job of a buy and hold investor is: to buy a stock at a reasonable price level and hold it for several years (5+ years) and simply keep an eye on the business to make sure that no fundamental reasons as to why you bought the stock has changed.

Whether you are investing in stocks, mutual funds, your education, or a business, realize that you need to invest your money somewhere if you are ever to become Financially Independent.

As always, if you found this article helpful, insightful, or enjoyable, then please subscribe, like, comment, and share!

Thanks!

Jack

 

P.S. Do not invest in any stock solely based on the information above. This article is meant to be supplementary to your own education and JackedFinance may or may not have vested interest in the stock(s) mentioned above.

17 comments

  1. This is a great article. As a financial advisor, I’m often reminding clients; emotions have no place in investments. Take a step back, think about what you’re doing, and leave your pride at the back door.

    I look forward to reading more!

    -A

    1. Thanks!

      Emotions rarely help when it comes to making life decisions. I think the most important thing is to realize that we all need to realize that recessions happen when everyone in the market loses confidence in the market simultaneously. The best thing we can do it to maintain a level head and think before we hit that buy/sell button.

      I will definitely keep writing more.

  2. I bought Apple and Netflix in June 2016 when they were on a downswing. Got them both for under $100/share. I had no clue what I was doing. I just knew they were affordable and I was a consumer of both companies. My only regret is that I didn’t buy even more back then.

  3. If you keep up these posts, you might actually convince me to leave my index funds 🙂 Not really–I’m at least going to stick with them until I have the time to research these companies like you do–but you’ve got me intrigued on the ways you approach this stuff.

  4. I feel you have to get the stock quite young to do this otherwise it’s already at quite a high price. I guess I would look for companies with 30-60 day lows but think they’ll bounce back.
    I do agree with riding along even when your stock dips!

    1. Finding a company in it’s early days is good – like the FANG stocks.

      However, I definitely think there is something to investing in underdogs like AMD in 2015. There are many stocks that have been crushed over the past 3-5 years that could potentially provide huge returns over the next decade or more.

    2. I’m not entirely convinced Kangaroo. I think even if it is an established stock, if its got steady dividends and is positioned in a growth market it could still have significant upside. Having said that, I am an index fund person myself so no guru on it. I do hold some individual stocks bought just after the GFC bust which have not done too badly

      1. Yeah, but dividends aren’t a tell of growth, though. The amount of growth is harder for a dinosaur. It’s also hard to consistently watch so many individual stocks; It’s a lot of work. I too prefer Index funds. I was in high school then, i wish i would’ve had the chance to invest back then. I am really hesitant in investing in individual stock but i have been looking at med sized stocks at its 60 day lows and starting my research with those companies.

  5. Greed definitely got me. I held onto a stock for too long thinking it would keep climbing – let’s just say I made some money on it but not nearly as much as I could have!

    1. For sure! knowing when to sell a stock that has done well in the past is one of the hardest parts of investing.

      I had stock that was up 35% but is now down 15% from the price i bought it. But I guess that the nature of investing :).

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