| A&A Morning Glory Learning Sdn Bhd |
- Understanding Your Own Emotions
Gambling Behaviour And Speculation
It is believed that gambling behaviour and speculation are part of our human basic
trait. Statistics showed that 1.1% of men and 0.5% of women are “probably
compulsive gamblers”.
In general, speculators often dictated by factors such as tips and rumours to take
advantage in the stock market. This behaviour is usually unpredictable, short term
and unwarranted.
I would strongly advise genuine investors to avoid following the crowd blindly as it
is always a double edged situation – either huge profit or heavy losses.
Greed And Fear
There are two cardinal sins: Greed and Fear, which are inherent in human beings.
For instance, we bought some stocks and we are starting to make profits. Assuming
we made a 50% profits in a particular stock, our greed will tell us not to sell, as we
are hoping the price to go higher. However, it didn't’t, instead it fell back to the
original price.
One month later, the price moved up by 10%, and our fears kicked in, spurring us to
take profits. So without a proper strategy plan, we are blinded by our own emotions
and instincts that prevented us from making the right decision.
Hence, we should never let our emotions cloud our trading judgment. What we can
do is to turn the crowd’s fear and greed to our advantage! To exploit the market
psychology, we must act in a contrarian way when the crowd falls prey to their
emotions.
Overconfidence
Overconfidence can cause investors to underestimate risks when investing in stocks.
Studies have proved that investors who have recently earned high returns will tend
to take more risks in their future investment (in stocks.)
I’ve seen many of my friends who fall prey to this emotion. They initially made tens
of thousands of dollars. However, due to overconfidence, they invested more
heavily than before and they even tolerated with much higher PE ratios. As a result,
they give away the gains back to the stock market!
Underreaction and Overreaction
Investors tend to overreact to unreliable information and underreact to highly
reliable information. For instance, if Company A has been giving 10% dividend to its
shareholders for the past five years, investors will underreact to this piece of
information if the company announces another dividend of 10%. However, if
Company A suddenly announced 40% special dividend, investors would be likely to
overreact to this piece of information by snapping up the stocks.
TITLE>www.stocktips123
| Copyrights 2005 by A&A Morning Glory Learning Sdn Bhd. All Rights Reserved. |
ATRTICLES
 | |  | |  | |  | |  | |  | |  | |  |