Emotions can be an obstacle to achieving a good long-term return. The risk is, among other things, that you invest for the short term, overestimate your own abilities and sell the winners and keep the losers.
In fact, 100 percent of rational people are perhaps the best investors. They have no feelings that can prevent effective and rational decisions, and they act freely in relation to previous decisions. That kind of people are rare, so what should everyone else do if we want to prevent too many irrational emotions from interfering with rational and poor investment decisions? Training and experience are necessary, but if you are aware of three simple rules, you are already well on your way to making better decisions and thus achieving an attractive long-term return.
Beware of the time
There is a big difference in time and real time. Many investors are very likely to weigh new information higher than older and perhaps more important information. The man has a built-in trap, which means that we often rely on the knowledge we have just got to make decisions in the present. It is good in the short term when you need to orientate in traffic or talk to other people, but it is poison to long-term investment decisions that need to be rational, stable and well-advanced in the future.
All investments are about assessing the future. Therefore, the basis of the decision must be in order. This does not mean that as an investor one should not respond quickly to new and important information, but that means that one must be cautious about extending the immediate past with boards too far into the future. Just because an investment has not performed measured over a short period of time, one cannot expect it to continue – and vice versa. On the other hand, it is the analysis and assessment of the long-term investment that must make the decision to buy and sell. Also, remember not to act too often.
Don’t overestimate your own abilities
There are probably many investors who think they have been very skilled over the past six years, as they have achieved very large share gains. It is also true, but there has also been significant co-operation from the global stock markets, which rose by more than 150 percent during the period. Only very unfortunate or over-cautious investors have avoided gain.
How many bills do you think will judge their ability as a bill to be better than average? A Swedish study showed that 90 percent thought they were driving a better car than the average … Therefore pay close attention to adding the skill that you bought shares in Novo Nordisk five years ago and they have scored a gigantic gain. It is not skilled alone. It is also good luck and willingness to take a risk. Therefore: Be humble, listen to advice, measure your return on the market, and check your risk.
Sell the losers and keep the winners
When it comes to the assessment of the individual securities in the portfolio, it is generally the case that one has difficulty selling a share that one has bought at a higher price and now lies with a larger or less unrealized exchange loss. At the same time, it is tempting to sell out of a shareholding that has risen to twice, because one is never poor at taking a win. That’s right, but that doesn’t mean you get rich in taking profits – especially if it happens prematurely.
For example, US big investor Warren Buffet has owned shares in the same insurance company for more than half a century – with good profits. It is the long haul and clever patience that really matters to the return. Sell your losers if an updated analysis shows that it may take a long time for it to reappear, or if there is another security that looks more promising. Only sell out of the winners if the portfolio has been risked so much that the overall risk has become too high – or if you need the money for consumption/savings.