Emotional Regulation: The Bane of Every Investor
If you plan to take control over you’re own retirement plan, 401(K), or just want to get into the stock market and start investing — you have to master emotional regulation — period.
Let’s say that you own 250 shares of Chevron (CVX), and you just finished reading about and listening to all the chaos surrounding some new war that broke out over in the Middle East somewhere.
Not the violent kind of war, thankfully, but one that will have an impact.
An economic impact.
Russia and the Saudis and fighting over oil prices and considering that the two countries produce and export a large percentage of the world’s oil (not to mention the effect that OPEC can have), this can turn into a rough situation for the world's economy.
You’re empathetic for the world, but only one thing is going through your mind right now. . .
Those 250 Chevron shares you just picked up last week!
This is a hypothetical situation — of course, this would never happen.
For argument's sake, let’s say it does happen and you’re long 250 shares of Chevron, a god damn oil company. Not an ideal situation to say the least. How would you respond to this?
There are a couple of different ways an investor could handle this situation — depending on their emotional control
So, you aren’t in the most ideal situation, but at least it’s early and you don't have work today. The market has only been open for about 45 minutes, and you’ve got plenty of time to think, plan, and execute.
Option A
- Perhaps you consider buying more CVX shares? Take advantage of the lowering stock price since the Saudis are pumping the market full of oil, intentionally decreasing the price per barrel by inflating the supply. This will hurt the Russians, but the Saudis can hold out. Well, in that case, this would be considered a small blessing in the grand scheme of things. So you buy 250 more for half the price.
Some people might call that insensitive, but you call it Dollar Cost Averaging, or DCA.
Option B
- Maybe you were already having doubts about CVX. You aren’t particularly happy with the results you’ve seen so far, plus you really don’t like how management has dealt with public relations issues. This recent event only served to confirm your doubts, so you cut your losses and move on. Plus, since you lost money on the trade when tax season comes you’ll get to write this off as a wash sell, lessening the bill to Uncle Sam. Not a complete loss!
Another very rational way to assess and handle this situation.
Those are two prime examples of how taking a step back and thinking through what’s the best decision to make for the long run can help you. You can’t always worry about other people, we all have our own issues to deal with.
Once you become a billionaire from your investments, then you can take up philanthropy and sign the Giving Pledge like Bill and Warren. Give your vast fortune to some charitable fund.
What’s the main lesson here?
Whichever decision you would have made is irrelevant. The fact that you did it without letting your emotions get in the way is what matters most.
You could’ve panic sold as soon as you turned on Yahoo Finance and watched the pundits talking about: “Trade War!…OPEC!…Oil Companies are doomed!”
The media loves drama. Whatever draws eyes away from YouTube and back to them is a viable option. The facts rarely apply these days; it’s unfortunate, but we have to live with it.
As long as you remember they’re biased at times, it’s another liability you turned into an asset — because now you have a good idea as to how everyone else will react to the news.
Aka: Going in the opposite direction of the herd when investing will give you more wins than losses. Unless you’re in before the herd due to your own research and preparation.
Human Tendency
Look, I’m not trying to tell you what to do — rather, I’m trying to tell you what not to do. I might not be the master of investing, but I like to think that I know a thing or two about what not to do.
Take a look at my P/L ratio from 5 years ago and you’ll agree with me on that point.
In my experience trading stocks and options, I’ve noticed that people who are new, or newish, to investing tend to have similar reactions depending how their trades play out.
You don’t have to act either way as long as you’re aware of it and keep your head in a difficult situation.
Always remember — the Stock Market reacts to the news while a Stock Trader plans for news — Then the trader watches the market’s reaction, adjusting their plan accordingly.
If you can figure out where the heard is likely to go and make your plans based off that, then you’ll find lots of success in your investing career.
I had this sponsor in AA who once told me:
“Steve, before, back when you were running around on drugs, messin’ up lives and being a bum, it wasn’t your fault.”
“You have a progressive disease — mental, physical, and spiritual — called addiction. So! Now you know that you have a disease. You couldn’t help that you were born with it.”
Then he explained that there was a cure for this disease.
“Now you also know there’s a solution to the problem. Something that can arrest your disease and help you to fix your life.”
“So! You’re now aware of three things: That you have a disease, what causes it (drugs & alcohol), and the solution for it.”
I was so confused. . .
He looked me straight in the eyes and said: “So, if you fuck up and get high again — start stealing and all the crap that comes along with drug and alcohol use — it’s 100% your fault.”
“You will have nothing and nobody to blame but yourself.
“Once you know there’s a solution to your problem, you can choose to accept it and get better, or choose not to accept it and face the consequences.”
This doesn’t just apply to addiction & alcoholism. It applies to daily life in a way. If you seek out help investing, get the knowledge and skills you need to succeed, but choose to no employ them. . .
It’s not the markets fault. It’s not the 1% and their corruption or the “rigged” stock market. It’s you.
The two situations that new investors tend to have the worst reactions to
- When they lose money on a trade.
- When they make money on a trade
To be honest, I’m not sure which one is worse for a new investor. As unlikely as it sounds, it’s probably making a lot of money early on.
Anyway, let’s start with losing money.
I’m not Warren Buffett, but this is what I tend to see happening a lot when people first start trading. Hint: One is the right way to respond, one is not.
- Intense greed as they try to make up for lost money. This usually leads to even greater losses.
- A temporary feeling of guilt for not being more careful. Then they snap out of it, take a step back, assess what went wrong to make sure that it doesn’t happen again, and be thankful they stuck to the stop loss they had in place in case the trade went south.
Depending upon which of the two reactions one has is irrelevant. But, as my sponsor would say, now you know the solution, therefore you have to change. Either that or accept the fact that you can’t control yourself, and you must control yourself if you want to succeed with investing.
Trust me on this one, for I was the type of person who chose option number one for far too long.
It’s human nature and any investor who says they never acted like this when they first began is a liar.
Or, I guess they could be some sort of sociopath?
Who knows, but boasting when we make money can be just as dangerous as the reaction to losing money.
Let’s see how the young, naive, steven reacted the first time he hit a home run.
Another flashback to my early career as a terrible investor
It could be your 3rd-week trading, account almost drained from losing trades, but if you happen to hit the big one by pure chance, well, then suddenly you’re the market expert.
The advice doesn’t matter anymore.
In fact, you should be listening to me!
I thought that way once. When I first started out about 6 years ago, I was down to nothing. Started with $800 and a month later lost almost all of it. I had $67 left.
So, I did the rational thing and bought a Call Option that was wayyyyy out of the money, for about $38. Basically gambling the rest of my account on a trade I really didn’t understand.
But. . .
When I woke up the next morning, the underlying stock had shot up by $9 overnight! If you don’t know, in the options world a 9 dollar move in the underlying stock of your contract can cause your Call to rise in value, greatly.
Plus, my option had other good things going for it, but I didn’t understand that at the time.
The moral of the story is that from that day on (which lasted a week) I thought I was the king.
No one could give me advice! I told them all how much I had made on that trade. In fact, it was I who gave them the advice for once.
Let them chew on that for a bit.
My next few trades didn’t work out so well. When we win money, we can lose emotional control just as easily as when we lose. It’s like walking on a razor's edge, danger is all around you.
The scary part is, emotional control is only one aspect of being a good investor. There were still many things that needed to learn before I could truly call myself an investor. But, I never gave up and kept trudging forward no matter what.
If you are committed, willing to listen to advice, and have a passion for investing and the financial markets, then you’ll be okay. Don’t ever doubt yourself.
I dropped out of high school in 11th grade, never got a GED, and obviously never went to a college. I was once a homeless drug addict, yet now I live in LA with a family I love and a home. I got two awesome dogs, a badass computer, and I fully support us from trading stocks, options, and crypto.
If I can figure it out, so can you. I wish you nothing but success.
I hope you enjoyed this story. Real quick before you go, I know you already figured this out but I think I have to say it anyway. I’m not a financial advisor. Trading is dangerous and you should always seek out a licensed broker in your area to help you with making financial decisions.
And don’t do drugs! Haven’t you seen that old commercial with the egg?
“This is your brain on drugs. . . sizzzzling sound as the egg fries in a pan.Then MTV music videos came back on, starting with Nelly-Grillz of course. The OGs will know what I meant by that.
One last thing, if you enjoyed this article then you should check out my publication, The Self Hack. Thanks!
