In my last post I mentioned this was going to be a series. I’ve made a few Screw-ups on my way to a million. Today’s post is about investing emotionally. In other words, falling in love with your investments and the disastrous consequences associated to it.
Different emotions in play
It’s okay to get emotional when investing. When the stock is up I’m happy and when it’s down I get pissed. Can’t help it, it’s just another day on the job so to say. Investing emotionally isn’t okay, it can cloud your judgement.
There are several ways in which you can get tied up emotionally with your investments. Some that are hard to avoid, but can really turn you off from what you’re doing. In some cases they can cost you dearly.
Last week I wrote about putting all my eggs in one basket when I put all my 401(k) contributions in my company ticker. Besides losing it all, I was letting my frustration about my company’s stock performance interfere with my work. I call that one: emotional spillover.
For those that prefer rental property over stock a common one is dealing with your tenant. Tenants that make your life miserable as a landlord or simply tenant that won’t pay the rent. Even though it’s a business, it can help your sleep at night knowing you might have to evict someone. I call this simply: human emotion. It tends to happen when dealing with humans and it comes in many forms (Love, hate, empathy, ….).
The one that’s screwed me over a few times is getting emotional about the companies behind the stock ticker you invest in. It’s happened more than once (fool me once, … fool me twice…., I know, in my defense I did make it to a million before many of you). I call this one: Misguided love.
It hurts in my case, in the tune of some $70,000. First time falling in love was in the early days, still during the dot com bubble. The first digital cameras had made it to market, back when resolutions were still below the 1 megapixel and pictures were stored on a 3.5″ floppy. Irvine Sensors (IRSN) came up with this brilliant idea of a “film roll” that in fact was a digital camera. Just insert in your old analog camera and shoot. Its resolution: 4 Megapixel and best of all, no need to replace your expensive Nikon with all your expense lenses. I fell in love with the idea and invested big.
I didn’t look into the fundamentals of the company but instead went head over heels for their product. Long story short, the product failed to make it to market and after a long time I bailed. To pour salt in the wound, a week after I bailed the stock went up from $1 to $18 in a single day. My $10,000 investments could have been worth $180,000. Ouch, what an ugly breakup. Instead of walking away, I tried to rekindle the love. After it reached that high, it dropped down to $6 and in my mistaken believe that the rekindled love was mutual, I got back in with another $10,000. It wasn’t mutual. Digital cameras soon outpaced the prototype by many megapixels and along with the product so did the stock price. IRNS you broke my heart.
Lesson learned, right? Nope, the problem with falling in love is you don’t really control it. My next crush was on Energy Conversion devices (ENER). Their great new product: Laminate solar panels. Instead of slapping shingles on your roof you would lay down Uni-solar laminates. Weather resistant and could even withstand damage from hail. What is not to love?
At the time we made a very rational decision: we needed a new car and instead of getting a loan I would bide my time and invest in green technology. Once there was enough we would buy a Prius (yes, buying a hybrid did pay off). It worked. Between 2005 and 2007 I bought up to 500 shares of ENER. I didn’t make a lot of profit on the investment but certainly didn’t lose. I sold the stock and bought our first Prius in 2007.
Instead of leaving it keeping it a short term fling and moving on, I reinvested back into ENER. The love ran deep. Solar energy was the future, right? I ended up investing over $60,000 back into ENER after I had met my goal for purchasing the car. What happened next? The great recession!!
Things were looking great for green energy until the economy collapsed. Green energy still makes sense but when all the subsidies vanished in the austerity (mostly in Europe) the solar industry crashed. Energy Conversion Devices was one of the first victims. Its cutting edge technology was first to bite the dust. It went into bankruptcy and with it my $60,000. ENER you broke my heart.
How to avoid getting emotional
In an effort to no longer get emotionally involved and/or hurt, I’ve given up on love for individual companies. I’m no longer investing emotionally. All my investing has become strictly platonic. I’ve since, primarily focused on buying SPY in my after tax accounts and VINIX in my 401(k) (Vanguard S&P 500 tracking fund). It’s done well for me. Since these really track the market there’s not much to do but just sit back and see where it goes. Historically it’s been up.
So what to take away from this? Well if at all possible try to avoid buying individual stock as chances are eventually they’ll fail. If you do pick stock make sure is based on analysis and not emotion. If you’re holding a specific stock and you get emotional around its price fluctuation, take a step back and reconsider why you’re holding it. It might be good to breakup, walk away and pick yourself a new winner. Trust me, you won’t hurt its feelings.
If you want to invest without falling in love, buy an ETF (exchange traded fund) like SPY (S&P 500), QQQ (Nasdaq) or DIA (Dow Jones). There nothing, or too much, to fall in love with (it’s hard to fall in love with an entire village). In my post KISS applied to my investments I explain how much more money I’d have today had I stuck with just buying (and selling) SPY.
If you feel you currently might be in love with one of your investments, take a step back and make sure it’s for the right reasons. Even the prettiest girl or hunkiest dude can have a rotten personality.
Good luck reaching your financial goals.
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