Humans are all emotional beings. We do not often make decisions rationally. Emotion is part of us as investors. Investors may really feel better towards stocks at specific point or they may feel that owning stocks are risky and steer clear of it at all costs.
Investors may possibly also feel attached to a specific business and continue owning the stock without regards to how the business is doing. For instance, you may like Google?s search engine so much that you decide to buy the stock at $350 without doing any analysis.
You figure that Google?s internet search engine is so much better that acquiring the stock will give you profit, right? Wrong. Now, I?m not here to bash Google as an investment, but analyzing an investment goes beyond the products and businesses.
Most investors can determine excellent businesses and products. It can be quite simple. You know that a Mercedes is actually a better car than a Ford or a Civic.
The next question is just how much should you pay for a Mercedes or a Civic? This demands us to put aside our emotions for a second and think clearly.
Sure, you would like to have a Mercedes in your life. It is luxurious and has fancier features than a Civic has. But, that does not mean you should overpay for it. It works similar with stock investing.
Google can be a very good search engine, possibly the best that?s ever produced so far. Sure, you most likely pay more for Google than other generic search engines. But, please do not over spend. You invest in Google to profit from it not because you like its goods.
So, how do we remove emotion from our investing decision? We cannot remove it fully but there are certainly tools that might help.
One would be to calculate the fair value of a common stock that you are investing in. I covered this plenty of times, but essentially, the fair value of an investment depends upon the streams of profit generated by it.
In the long run, if company X earns more than business Y, then company X is going to be valued more than company Y.
For a company that?s expanding such as Google, you?ll be able to incorporate its growth and calculate the fair value with growth. I?ve talked about this once and you?re welcome to look at our commentary section.
If you?re considering purchasing stocks for a company going public, make sure you?ve completed all your research. Many companies go public, to boost their business plans. For more info, search: company go public.
I know I didn?t specifically give you the very best remedy to the difficulty. Emotion is hard to ignore. I am not immune to that. But following your emotions will cost you a whole lot of money.
Just watch those investors that purchased stocks through the NASDAQ peak in 2000. Don?t go along with the herd and keep your focus on the fair value of your stock. You will do really, truly well.
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