The emotional and illogical side of investing for beginners

“ If stock prices move contrary to our expectations, it creates tension.”

A MOST important tip for trading is to keep your emotion in check. Use logic, not emotions. Do not allow emotions to get the better of you; otherwise, you could be forced into a losing trade. Be aware that stock prices influence the collective emotions of investors. When investors are worried about a company, its price declines. When investors feel optimistic about the company’s future, its price rises.

A person who feels negative about the market is called a “bear,” while a positive investor is called a “bull.” The constant battle between bulls and bears results in the constant rise and fall of stock prices. These short-term movements are driven by emotions from rumors, speculations, and hopes rather than logic and systematic analysis of the company’s assets, management, and prospects.

If stock prices move contrary to our expectations, it creates tension. Unexpected price movements create uncertainty as to what to do next – sell to avoid more losses, sell to lock in profits, keep and wait for rebound, or buy more to take advantage of price dip. Should I sell my position and avoid a loss? Should I keep the stock, hoping that the price will rebound?

If stock prices move as expected, there are still questions: Should I take a profit now before the price falls? Should I keep my position since the price is likely to go higher? Thoughts like these will flood your mind, especially if you constantly watch the price of a security, eventually building to a point that you will take action. Since emotions are the primary driver of your action, it will probably be wrong.

When you buy a stock, you should have a good reason for doing so and an expectation of what the price will do if the reason is valid. At the same time, you should establish the point at which you will liquidate your holdings, especially if your reason is proven invalid or if the stock doesn’t react as expected when your expectation has been met. In other words, have an exit strategy before you buy the security and execute that strategy unemotionally.

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Victor Santos Sy graduated Cum Laude from UE with a BBA and from Indiana State University with an MBA. Vic worked with SyCip, Gorres, Velayo (SGV – Andersen Consulting) and Ernst & Young before establishing Sy Accountancy Corporation in Pasadena, California.

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He has 50 years of experience in defending taxpayers audited by the IRS, FTB, EDD, BOE and other governmental agencies.  He is publishing a book on his expertise – “HOW TO AVOID OR SURVIVE IRS AUDITS.” Our readers may inquire about the book or email tax questions at vicsy@live.com.

Victor Sy, CPA, MBA
Victor Sy, CPA, MBA

Victor Santos Sy graduated Cum Laude from UE with a BBA and from Indiana State University with an MBA. Vic worked with SyCip, Gorres, Velayo (SGV - Andersen Consulting) and Ernst & Young before establishing Sy Accountancy Corporation. He retired after 50 years of defending taxpayers audited by the IRS, EDD, BOE and other governmental agencies. He published a book on “How to Avoid or Survive IRS Audits.” Readers may email tax questions to vicsy@live.com.

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