Removing emotions when making investments, tears of joy or sadness will come later
No one should be surprised by the seedy characters that come out of the woodwork during a time of vulnerability. Since the outbreak of the coronavirus across Asia and then the world, a number of investment scams have surfaced. If you’ve seen research reports or promotions touting opportunities to invest with companies that are working to cure coronavirus, think twice before buying stock shares. According to the Securities and Exchange Commission, which released an investor alert at the beginning of February, warning about an uptick in investment scams attempting to take advantage of the coronavirus outbreak, “fraudsters often use the latest news developments to lure investors into scams,” the agency’s office of investor education and advocacy said. The coronavirus has particularly dominated the news cycle in past weeks. The SEC said that it has become aware of “a number of internet promotions, including on social media, claiming that the products or services of publicly-traded companies can prevent, detect or cure coronavirus, and that the stock of these companies will dramatically increase in value as a result.” All completely rubbish claims.
The harsh reality of the stockbroker, wealth manager, private investment guru is not about scams but most definitely the ability to leave emotion at the door when it comes to investing, amongst other things. Any successful broker will be able to do this in a few different scenarios. The first and foremost bit of advice would be to never become emotionally attached to a stock or investment. Too many investors make the mistake of attaching themselves for different reasons. They may just love a product so blindly that they won’t sell a stock when it is plummeting.
It could be that an investor becomes emotionally attached to their company’s stock, which leads to an over-concentration and a lack of portfolio diversification. Often a stock that was granted as part of a compensation scheme will make it difficult to view it objectively.
There is no room for sentiments or emotions in the markets. Don’t confuse this with moral and ethical trading. Many investors won’t invest in certain industries such as drugs, alcohol, firearms, emission inefficient businesses, (non-renewable energy), which fall under the headline of ethical trading. But as far as investment trading goes, there can be no room for emotions.
Some examples are events that are extraordinary and usually not very nice. Oil disasters such as Piper Alpha that sadly blew up in 1988 or the huge Deepwater Horizon BP oil spill in 2010. Both of these either sent the energy sector into free fall or the individual stock line such as British Petroleum in a downward direction. The bottom line is that shares could have been bought straight after the knee jerk reaction, sat on and profit taken when the shares returned to normal. I appreciate not everyone will subscribe or even like what I am saying but it is the bare truth.
Other, more extreme, examples would include the Costa Concordia, the cruise liner passenger ship that sunk off the coast of Italy in 2012. This tragic event led to the death of 32 passengers. No one would suggest for a second that this was not a truly sad story, but behind the scenes, investment managers would quite rightly so be looking at the impact on markets. They have a responsibility and an obligation to their clients to manage their funds correctly. Every knowledgeable trader would know that the parent company was Carnival Corporation and Carnival plc, which is the world’s largest travel leisure company. Their stocks dropped 16% on the day and if you were willing to buy and sit on them, you would have recognized all of that loss back as a gain in mere months.
The list of disasters that have resulted in stock pricing anomalies is endless and they will continue to occur whether they are the result of human error, terrorist behavior or acts of God (if you aren’t religious then Mother Nature). You have to hang up your emotions at the door when trading. Don’t become emotionally attached to an investment and at the same time don’t deny a trade because of the emotional factor.
Let’s be brutally honest. No one would ever employ the services of a broker or wealth manager if they were weak in the emotional trading arena. All avenues of growth, no matter what they are, need to be investigated as and when they occur—as long as they are completely legal. Add this as just a part of your broking philosophy and you will do well. Just as I do.
Photo by Juhasz Imre