Tuesday, October 22, 2013

How To Get Rich - Understand Human Emotions

Do you know what emotion causes investors to lose the most money ?

Do you know how to avoid making mistakes based on emotion ?

Read on to find out how to profit from Human Emotions !

Two Emotions That Fuel Markets

The stock market can be a great place to make a lot of money. It can also be a place that many can lose a lot of money. The reason many lose a lot of money is because of human emotion.

There are two emotions that cause individual investors to make the wrong decisions at the wrong times. These two emotions are fear and greed.

When stock markets are soaring and everything is going up , up, up every day, people get greedy and keep buying long after they should. Many lose sight that things can and do go down very suddenly. Once the market starts to go down, these same inexperienced investors start to become fearful believing that they could lose everything. This often results in panic selling far beyond what is rational, driving the markets down even further.

Fear and Greed are two emotions that experienced investors take advantage of to increase their profits.

How To Make Emotions Work For You

First of all, you must remove all emotion from your investment decision making. You should be choosing your investments based on facts about the underlying businesses, not about hype and what everyone else is talking about. Choose businesses that are making money each and every day no matter what the stock markets are doing at the time. By choosing good businesses you can ignore the everyday fluctuations in markets most of the time.

However, there are times when you can use these fluctuations to make more money. Let me explain. When the markets drop in value, the underlying businesses shares drop in value as well. What this means is that everything could be on sale. You could snap up more shares of your great businesses for a great discount.
Use the fear of others to buy more shares of great businesses.  

On the other side, when the stock market is going up, up ,up for a long period of time, everything becomes very expensive to buy. This is the time when the wise investors actually start selling their shares and build cash  to use for the next sale or market downturn. Use the greed of others to lock in your gains.

Understand Cycles

All markets have cycles. Even without the emotional influences,  markets go up and down for many other reasons. What emotions tend to do is exaggerate these cycles tops and bottoms. By understanding the natural cycles of the markets you are investing in, you should be able to know when the good times are for buying and when the good times are for taking profits. These profits can be used for the next buying opportunities.

The more frequent these cycles are, the more often you can take profits. Thus, the more volatile the market you are in, the more opportunity for profit. But only invest on facts, not emotion.

What To Do

You must take all emotion out of your investment decision making. Buy only good, profitable businesses based on the facts about their underlying operations. Preferably, buy only businesses that pay you a dividend every month or quarter.

Sell some of your shares when you feel they have become too expensive because of the greed of others. Keep the cash from your sales for buying at a later date when everything goes on sale again because of the fear of others.

Understand that cycles are a normal part of investing and that they can be used to make more money if understood properly.

Most importantly, do not become greedy with your investing. Do not become fearful when things go down.
Opportunity awaits if you learn to go against the flow.

As always, I welcome your comments and suggestions for future topics.

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