should you be concerned with market cycles?
One of the most important aspects of investing in the stock market is the ability to control your emotions. The most financially successful investors have had this ability and for the most part, it has paid of in form of mega returns. I mean look at Warren Buffett and John Paulson the hedge fund manager.
The ability to control yourself in the face of life threatening crises is also important in other ways, like financial samurai showed with this post.
We all know that the stock market is one of the most unstable markets in the world. One minute, an IPO stock is flying high over its real value and the next it has lost 90% of its value for no apparent reason. Some times the price of a stock is so low that no one even wants to get caught thinking about buying into it and the next, the price has shot up to the stratosphere; again for no good reason.
An investor who decides to base his career following a visibly unstable stock market will probably have a very short career, if it does not end before it starts. Value investors claim that people that follow this mode of investing are not even worth of the title of investor; they should be called speculators because they visibly have no idea what in the blue blazes they are doing.
The ability to control yourself when lesser men are cowering and doing the chicken-little-sky-is-falling dance is something that the investor should have. And therein lies the problem. Isn’t the ability to keep calm under pressure something that one is born with?
I am for the opinion that there are some people that can keep calm when the sky really is falling and others that just do not have that ability. A good example is emergency room doctors. Patients with all manner of ailments and infections bombard them from all sides and they seem to take it all in their stride. Can you imagine having to deal with a patient with his insides hanging out, another with his half his head blown away, another with a skin eating infection and another with advanced STDs? All after lunch? Yet these people do it with a disturbing calmness. I cannot think of doing this all day every day.
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DO THIS SURVEY AND GET SOME CASH TO PAY THAT PHONE BILL
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My mum told me that medicine is a calling and not a profession; you can either do it or cannot. Somehow i am starting to think that the same applies to active securities investing. Imagine having the courage of watching 80% of your lifelong investments go down the drain and stay calm? Yet, this is something that the Benjamin Graham’s intelligent investor advocates.
For real life examples, we can start with Warren Buffett. He has this ability to keep market excitement separate when making his investing decisions and even goes on to say that ”be greedy when all others are fearful and be fearful when everyone else is greedy”. While this seems doable in paper it isn’t so easily done in the battle fields(read the stock markets). If it was, there would be more people with net worths of tens of billions of dollars. Another one is the hedge fund manager John Paulson who shorted securities in the housing crisis, betting that everybody else in the world was wrong and he was right; and guess what it worked and he made billions. I really think that these people are not like the average John Q public. You either got it or you don’t.
Sometimes, things happen and i see that i am not suited to active high stakes investing because i have a hard time controlling my emotions, particularly when hard earned money is involved.
Over to you, do you find it easy to control your emotions when investing with hard earned money? Do you, like me, think that active investing is not for anyone because not everyone has the right faculties or are you for the opinion that anyone can learn to be an active investor and control his/her emotions?
I appreciate your thoughts on this matter.
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