Wednesday, 30 October 2013

Learning Emotional Detachment

So emotional

Investing in stocks is an emotional business. Once we've invested in a stock it is natural to will the price to go up. If the price starts dropping we start to worry.

The Buffett Way

Well, not if you are Warren Buffett. He points out that if the share price of your investment goes down, that is a good thing because you can buy more of the stock for less. Buffet is not looking to buy cheap and sell high. He is looking to buy stocks in companies with stable and growing earnings as cheaply as possible. He has his eye on long-term and short-term prices movements are just noise.

In fact he buys with the intention of never selling so he does not care what happens to the share price. The only thing that matters is long-term earnings. The only reason to pay any attention to price movements is to look for entry points to accumulate more good stocks on the cheap.

Buy? Sell? Hold?

But while temperament is important in being a successful investor, it is not everything. You also need to have the ability to analyse and recognise long term value.

This is why it is not easy to follow Warren Buffett. Every investor is trying to get edge. So when a stock we own starts ticking down we start to worry if there is something we've missed. What if this is dip is more than just noise? What if it is the start of a falling knife?

Should I just hold on and hope things come right? Should I stock up and average down? Or should I sell out and cut my losses? Certainly, I have done all these things at various times guided by no more gut instinct. Invariably, I ended up doing the exact opposite of what I should have done.

Buffet doesn't have these worries as he has inscrutable confidence in his ability to recognise long-term value. So, if a share price dips he will always buy more.

I am not Warren Buffett...

If there is one thing I am certain about it is that I am not Warren Buffett. I will never have his gifts at stock picking. However, there is one thing I can try to emulate - his emotional detachment.

Mastering your emotions is probably the single most important skill in becoming a successful investor. An emotional investor becomes part of the market but an emotionally detached investor can rise above it.

....I am the Mechanical Bull

This is why I have committed myself to a mechanical investing style. When faced with a challenge, I do not have to make a judgement about what to do that is coloured by emotion. The system will tell me what to do, a system that is designed on proven investment principles. I will never be as clever as Warren Buffett but I can be as disciplined.

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