Humans are all emotional beings. We do not always make choices rationally. Emotion is part of us as investors. Investors might feel better towards stocks at certain point or they might feel that owning stocks are risky and avoid it at all costs.
Investors may also really feel attached to a specific company and continue owning the stock without regards to how the company is doing. As an example, you might like Google's search engine so much that you decide to buy the stock at $350 without doing any research.
You figure that Google's search engine is so much better that acquiring the stock will give you profit, right? Wrong. Now, I am not right here to bash Google as an investment, but analyzing an investment goes beyond the products and companies.
Most investors can identify good companies and products. It is quite simple. You know that a Mercedes is a better car than a Ford or a Civic.
The next question is just how much should you pay for a Mercedes or a Civic? This requires us to put aside our emotions for a second and think clearly.
Sure, you'd like to have a Mercedes in your life. It's luxurious and has nicer looking features than a Civic has. But, that does not mean you should overpay for it. It works similar with stock investing.
Google can be a good search engine, probably the best that is ever produced so far. Sure, you probably pay more for Google than other generic search engines. But, please do not over pay. You invest in Google to profit from it not because you like its products.
So, how do we remove emotion from our investing decision? We can't get rid of it totally but there are certainly tools that might help.
One is to calculate the fair value of a common stock that you simply are investing in. I covered this plenty of times, but basically, the fair value of an investment is determined by the streams of profit generated by it.
In the long run, if company X earns more than company Y, then company X will be valued more than company Y.
For a business that is growing like Google, you can incorporate its growth and calculate the fair value with growth. I have talked about this once and you are welcome to examine our commentary section.
If you're thinking about buying stocks for a company going public, make sure you've done all your research. Lots of companies go public to improve their business plans. For more info, search: company go public.
I know I didn't exactly give you the best remedy to the problem. Emotion is hard to ignore. I'm not immune to that. But following your emotions will cost you a lot of money.
Just watch those investors that bought stocks during the NASDAQ peak in 2000. Don't follow the herd and keep your focus on the fair value of your stock. You will do really, truly well.
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