Optimism and unrealistic minds of investors, can produce huge losses. To manage well investors need a realistic, knowledgeable outlook. Today we discuss the need for reasonable optimism and acceptance of market reality. This post continues our discussion of the 10 Paralyzing Mental Blocks of Investors and is Part 5 discussing emotions and psychological aspects of investing in the White Top View Series, Mind Game . Links to all six parts of the White Top View Series, Mind Game are at the end of this post.
Optimism and Unrealistic Minds of Investors
6. Optimism: One great characteristic of most people is their optimism. We give each other the benefit of the doubt and look for the best.
Optimism is certainly justified in the markets. Most of the time, most of the listed operating companies produce mostly positive results. It is very typical to have about 3 out of 4 or 75% of listed companies reporting good or better than expected results. That justifies optimism, most of the time for most companies.
But bad stuff happens. There are bad companies, bad managements and sometimes, unexpectedly bad results.
Solution: When bad happens we can cope. If the stop is hit, sell. Do not ride a stock down. That sinks dreams. Sell and be grateful that you can count your blessings and your cash. Staying invested in such a stock will make you poorer as a person and an investor.
7. Running with the herd: If the markets were rational and people left their emotions out of the market, herd mentality could not exist. It does. It is entirely an emotional phenomenon and an extremely risky behavior. Indulging in this drug can give your portfolio a fatal overdose.
Solution: Think. Play your own game. Walk your own path. When “irrational exuberance” shows up, play near the door and be ready to grab your money and run out the exit. We can return and play another day.
8. Changing yesterday: We may want to kick somebody or ourselves for yesterday’s mistakes. But we can’t change the past. Our mistakes and losses are real. Accept it. Pick yourself up and deal with it.
Solution: Act on what exists now. Look forward to where you want to go. Put the past where it belongs, in the past.
Do not chase losses with more money. Never, ever under any circumstances average down. That increases the amount of dead money and it freezes any upside potential. Averaging down also means you take on an unknown opportunity cost.
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Links to the White Top View Series, Mind Game