Jonock's Blog : If you Knew it was wrong,,Why did you do it?

While investors know they made investment mistakes, and swear never, ever to repeat them again. Some of us only have a general idea of what these mistakes are, or, for that matter,even why we continue to made them over and over again. Why do we think and feel and behave as we do? Why did we act in a way that today, in hindsight, seems so obviously wrong? Only by understanding the answers to these questions can we begin to improve our financial future. Smarter people than myself have done studies and come up with some theories and answers on the problem, it's called behavioral finance. This is how behavioral finance works. Most investors are intelligent people, neither irrational nor insane. But behavioral finance tells us we are also normal, with brains that are often filled with emotions that are often overflowing. These emotions can affect the decision making abilities of people. The more emotional involvement the investor has in an issue the poorer your decisions will be involving the issue.

What we need is a decision making method that removes our emotions from the decision making process. This is where tools come to our aid. Humans , usually become emotionally involved, in all their activities whether its buying a car or selling a stock, your emotions are included in your decision making process. And since we cannot control our emotions at will, we need to find tools to help us make sound, objective decisions even when our emotions are 180 out of phase with the decision at hand.

Let me give you one example. Investors tend to think about each stock we purchase as an individual entity with unique qualities and characteristics, distinct from each of the other stocks in our portfolio. I am sure you have read the advice "don't fall in love with your stocks". We are happy to realize "paper" gains in each stock quickly, but procrastinate when it comes to realizing losses. Why? Because while regret over a paper loss stings, we can console ourselves in the hope that, in time, the stock will roar back into a gain after all, doesn't it still have the potential it had when you picked it?. Do you know anybody who has done this? The emotionless tool I use for selling stock is the old "trailing stop", placed at the time of purchase. I place a trailing percentage stop based on an average of the volatility on some selected period of time for the stock.

It doesn't matter which process, from buying through selling of stock, take the emotion out with the use of tools. You'll make more money.