On the other hand, when a security that we acquired strongly corrects, our ego takes it in an equally personal way. A fall in the price of a security is automatically associated with a “loss”, which is then associated with a “failure”. An investor in that situation will tend to throw in the towel and say that the stock market is not for him. If he stays in the market, he might become overly cautious.
It is high time that we stop associating the success or failure of our investments with the short-term fluctuations of our portfolio or of a few securities in our portfolio.
The phenomenon reminds me of tennis. Many years ago, I decided to try to remain as phlegmatic as possible during a tennis match. I try to remain impassive, both when things are going well and I’ve just made a good move, and when things are going badly, and I’ve just made a big mistake. A tennis match is long (especially at my age!) and I think it’s important to conserve your emotional energies by eliminating overreactions. When I was young, my idol was Bjorn Borg, who we called “ice-Borg” because he remained impassive in all circumstances. In addition to conserving energy, staying calm helps you stay clear-headed and make better decisions during tense moments in a game.
I also remember an important match that I won when I was young. I was so happy to have won that I celebrated loudly after the game. Consequently, I found myself completely mentally drained during the match that followed a few hours later, a match that I lost outright.
The stock market fluctuates daily. Sometimes it will fluctuate wildly, up, or down. Imagine the investor who gets carried away every time the stock market goes up by 1% or 2% or who despairs every time the opposite occurs. He has not finished expending emotional energy! Is he well placed to make objective decisions under such conditions?
The fluctuations are even worse for specific stocks in your portfolio. Take for example a stock as defensive and conservative as Royal Bank, the largest company in the Canadian market: its stock has fluctuated between $105.10 and $149.60 over the past 12 months!
If we internalize all these fluctuations and feel it in a personal way, we will not be done going through an emotional roller coaster. It is not because one of our stocks appreciates that we are right, and it is not because another loses value that we are wrong.
From one situation to another, you must try to eliminate all emotion and focus on your decision-making process. Go back to the reasons why you bought a stock: are they less, or even more valid than at the time of its initial purchase? Have there been any recent developments that might warrant the stock rising or falling?
As in tennis, there is another very good reason to keep calm on the stock market: it allows us to objectively analyze our mistakes and learn from them. By dissociating our ego from the return obtained from a stock, we give ourselves the opportunity to learn and make better decisions.
