Investors are rational people processing all the available
information in the market to make logical
decisions for maximum profits. But the truth of the matter
is that most
people aren’t rational or logical investors. They buy
stocks on tips from
friends or even strangers, because of something they heard
on the news, or
because a company makes a product they love and are sure
it’s going to be
a big hit. They know nothing about the company, its
management, or the
stock’s history.
Don’t let emotions govern your investment decisions. Remain
particularly cautious
of the following emotions:
Greed: Greed often seduces investors into making terrible
decisions.
During market rallies, investors often succumb to a herd
mentality,
throwing their money into the hottest sectors and
companies, inflating a
bubble that invariably bursts. Greedy investors often tend
to make bets
they can’t afford to lose and then fall into the trap of
making even bigger
bets to recover their losses.
Fear: Fear is the flip side of greed. People who previously lost
money
in the market, or just witnessed the pain felt by others,
can experience
such a massive fear of losing money that it paralyzes them
from doing
anything. Instead of taking on some risk with suitable
investments, they
put their money in low-risk investments with poor rates of
return.
Love: Don’t fall in love with your investments. They don’t return
your
love but have a good chance of hurting and betraying you.
All too often,
people refuse to sell when stocks begin to fall because
they really
believe in the company. Maybe they found it themselves or
received a
hot
tip from a friend. Yet, when a stock falls sharply on very bad news,
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