Investing is a rational activity, based on the calculation of an expected return for the future.Emotions are therefore bad advisers, because for a profitable allocation it is good to maintain lucidity and a certain coolness . Being part of human nature, however, emotions cannot be banished and the investor must therefore avoid being subjugated as much as possible. Euphoria and depression, in particular, appear as the two emotions one can most easily run into based on a positive or negative trend in one’s investment.
Markets are not roulette, but roulette can teach you
Making a profit is the purpose of any investment and it is therefore obvious that the actual making of that profit gives satisfaction. The self-confidence that one acquires in having understood how the markets would have moved does not, however, mean being infallible. On the other hand, having recorded a loss should not lead you to believe that the markets are something out of your reach, on which you are unable to venture.
Markets are by nature characterized by volatility, they are constantly changing, and this very volatility is what allows to obtain returns; no one, on the other hand, is able to predict exactly what will happen. If this were not the case, if the markets followed a constant and discounted trend from the start or if someone was able to know exactly what will happen and when, the volatility that creates the space to invest would disappear.
Markets are not the roulette of a casino : they are fundamentally less random and tend to operate on less immediate times. Like a roulette wheel, however, the markets are based on the probabilities that certain events will happen, that is, they are based on so-called rational expectations. If the more experienced players observe the sequences of winning numbers and the frequency with which they come out, the investor must analyze the so-called fundamentals of what is traded on the markets, because the fundamentals represent a good predictor of the future trend of a possible investment.. It is a question of not letting oneself be carried away by euphoria or depression, but instead of maintaining lucidity.
A profitable investment is the result of an analysis and a correct forecast (operations less difficult than calculating the probability that a certain number will come out on the roulette wheel), an investment that resulted in a loss is instead the result of the underestimation of elements that had to be more thoughtful (bearing in mind that the unpredictable, as also taught by what happened with Covid19, is not impossible in itself).
Markets feel emotions too
Since they basically do nothing more than mirror the expectations of investors, the markets also suffer from emotions. Speculative bubbles arise from the enthusiasm, i.e. the excess of confidence, that investors have in certain stocks or sectors (for example the dot.coms at the turn of the new millennium) and burst as soon as someone observes that ‘the king is naked’ , that is, there is no perpetual motion on the markets towards a constant acquisition of value.
The stock market crashes, on the other hand, arise from waves of panic that, although they can start from valid reasons, end up amplifying the destruction of value. In both cases, it is necessary to avoid the so-called ‘flock effect’ and to think that if everyone does so, there will be a reason and it is good to queue. In the case of a bubble in the process of forming, the way forward is therefore to sell before others do it and trigger a turnaround; in the event of a collapse, it is a question of understanding whether it is really necessary to sell rather than wait for a recovery or, on the other hand, to assess when the fall in prices makes it convenient to buy.
Emotions, in essence, are what you can go looking for once you have completed a good investment. As long as they take on the role of investors, however, the saying that calm is the virtue of the strong holds true .