Humans are all emotional beings. We do not always make decisions rationally. Emotion is part of us as investors. Investors might feel better towards stocks at specific point or they may feel that owning stocks are risky and avoid it at all costs.
Investors might also feel attached to a specific company and continue owning the stock without regards to how the company is doing. For example, you might like Google's search engine so much that you make a decision to purchase the stock at $350 without doing any research.
You figure that Google's internet search engine is so much better that buying the stock will give you profit, right? Wrong. Now, I am not here to bash Google as an investment, but analyzing an investment goes beyond the products and companies.
Most investors can determine great companies and products. It really is quite easy. You know that a Mercedes is a better car than a Ford or a Civic.
The next question is how much should you pay for a Mercedes or a Civic? This demands us to put aside our emotions for a moment and think clearly.
Sure, you want to have a Mercedes in your life. It really is luxurious and has fancier features than a Civic has. But, that does not mean you should overpay for it. It works similar with stock investing.
Google is really a good search engine, probably the very best that's ever produced so far. Sure, you probably spend more for Google than other generic search engines. But, please don't over pay. You invest in Google to profit from it not because you like its goods.
So, how do we eliminate emotion from our investing decision? We can't remove it entirely but there are certainly tools that might help.
One would be to calculate the fair value of a common stock that you are investing in. I covered this plenty of times, but basically, the fair value of an investment depends upon the streams of profit generated by it.
In the long run, if company X earns more than business Y, then business X will likely be valued more than business Y.
For a company that is growing such as Google, you can incorporate its growth and calculate the fair value with growth. I have talked about this once and you're welcome to check out our commentary section.
If you're considering purchasing stocks for a company going public, make sure you've done all your research. Many companies go public to improve their business plans. For more info, search: company go public.
I know I didn't specifically give you the very best solution to the problem. Emotion is difficult to ignore. I am not immune to that. But following your emotions will cost you a great deal of money.
Just watch those investors that purchased stocks throughout the NASDAQ peak in 2000. Don't follow the herd and keep your focus on the fair value of your stock. You may do really, truly well.
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