Stock Market Investing Methods
Should NOT Be Emotional!
No matter which of the stock market investing methods you use, you have to, have to, have to separate your decision making from your emotions.
Some investors think they already do a good job of this. Maybe. But I guarantee that 99% aren’t doing it. Why? Because it’s HARD! Let’s take a look at why it’s so important.
Money = Emotion
The reason separating investing and emotion is important is because it’s so hard! The vast majority of people in our society correlate money directly with emotion. It’s natural for us. It’s just the way it is.
Think about how you’d feel if you found a $100 bill on the ground. Point made.
That fact–that almost everyone in our society lets emotion into their money-moves–is the reason that the stock market gets so crazy and volatile. People get scared and sell when it’s not time. And they get excited and buy when it’s not time.
Emotional stock market investing methods
Check out the picture below. It’s a daily graph of Countrywide Financial (ticker: CFC). In case you’ve been living under a rock, people are scared poopless right now about sub-prime mortgages (among other things). CFC is the nation’s largest mortgage lender, so naturally, it got crushed.
Here’s an example of a massive, emotionally-powered, over-reaction.
Countrywide opened on January 8th, 2008 at about $7.50 per share. It closed at about $5.50. (Point A) This happened on absolutely massive volume, which means there were a lot of participants, and a lot of money changing hands.
So in one day, CFC lost about 25% of it’s stock market value. But nothing actually happened at the company that day. They were having business as usual. In fact, they were working on plans to be acquired by Bank of America for about $4B or about $7 per share.
Logical stock market investing methods
So myself, having separated from my emotion, saw CFC as a good deal that day. I was about 80% sure that they would go with BofA for $7 per share, and the shares were now on sale for about $5.
- I did what any logical investor would do.
- I bought 500 shares in my Roth IRA for about $5 per share.
- I planned on holding it for a year or two.
- The next day I just happened to check it and it was at around $8 per share (Point B)
- I did what any logical investor would do.
- I sold and took my sweet, tax-free profits off the table.
I made about 60% on that trade. Did Countrywide’s loan portfolio change in value by 60% in that one day? Of course not. Did their long-term growth-potential change 60% in that one day? Of course not.
Something happened that freaked out a couple big-time Wall Streeters, they started selling, other traders noticed the action, and it triggered an illogical, emotional sell-off. Clear-headed, logical investors absolutely love these little mood-swings. That’s easy money for us.
Most investors have their own stock-picking method that they think works. But what most of them lack is specific rules that they never, under any circumstances violate. Lacking in firm rules, when an emotional whim comes along, they throw all their ‘rules’ out the window, and just let the emotion carry them. That’s not smart stock investing.
So how do we separate $$ and emotion? Well, it’s pretty tricky. Even after you ‘master’ it, from time to time, emotion will pop-up and disguise itself so clearly as logic that you’d swear they were twin sisters.
Develop stock market investing methods based on logic
Use a consistent method to evaluate investments. Decide on a valuation model, and apply it uniformly to all investments that you consider.
The way I do it is by looking at earning per share or EPS, which is the same as saying ‘profit per share’. I look at the past growth rate, and research the company as much as possible to try and guess-timate their future EPS growth.
I do some other calculations, also, but the point is that I do the same thing consistently for every company I look at. If it passes my criteria, I put it on the buy list. If it doesn’t pass my criteria, I don’t buy it. I also have a set of specific sell rules.
There are tons of different stock market investing methods, but you have to find one that works for you, and use it consistently. When you consider breaking some of your rules, you’ll know that emotion is creeping in, and to not listen to it.
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