How To Spot Emotionally Invested Shareholders

How To Spot Emotionally Invested Shareholders

The Vocabulary

If you notice that an investor’s vocabulary evolved into us vs. them, it is clear that emotions are in play. Whatever happened to a market of buyers and sellers? Every one of us has a reason for getting in or out of a stock. When a person starts dividing buyers and sellers into teams calling the opposite party with names such nay-sayers, they’re it is baby. These are also the same people who will lay blame and personally attack others for selling their position, particularly if they were on the same sidefrom the beginning. Why does this investor care if someone unloaded his position or not? His reaction is simply emotionally driven especially when the share price is dropping.

Incorrect Information

Another sign that indicates an investor is emotionally deep with a stock is the use of incorrect information in touting the stock. You obviously need to do your homework in order to spot this sign. Did that investor buy based on a thread he read about the company? Does he understand the numbers he keeps on repeating? ??While presenting an incorrect picture of a company could be out of ignorance, in many cases it is mostly out of emotional commitment because the investor wants to believe in his stock. He is simply holding onto numbers in the belief they are the wonder weapon that will save the day. There’s a lot of numbers being thrown around on forums, beware of believing in numbers that are not yours. Always build your own scenarios even when you have access to analyst reports. For example, how many institutions are still using an AECO price above $3.00/mcf for 2012 in their scenarios? All the while spot prices currently enjoy the $1 handle.

Buying Power

People who are emotionally invested will often brandish their buying power as a weapon. So what if you can buy thousands of shares? So what if you can back up the truck? Does this increase your credibility in any way or does it turn the stock into a guaranteed winner? ??Many people enjoy a strong buying power in the market. What matters when investing is your confidence in your own research even if it turns out your call was wrong. Don’t let anyone sway your opinion because of the number of shares he holds. He might be honest about how much he is holding or how much he can buy but you are not him and you do not know what he knows and most importantly what he ignores. The idea here is to always keep your approach to a stock methodical reducing peer influence to the minimum.

In the end, remember that investors are all here for the same reason, making money. In most cases, they’re all in the market to date and not to get married when it comes to picking up stocks. Falling emotionally into a stock can happen to any of us which is why it’s good to be reminded of these symptoms. But most importantly, if you fail to identify the signs, you can end up falling for a believer and this could be deadly to your portfolio.

What else would you add dear reader?

 

As one of the people who has commented at Beating the Index I began naturally to wonder if I am one of the people that you see having a emotional attachment to companies. But I havent yet seen comments here at Beating the Index that would indicate such, so perhaps you are referring to a bullboard somewhere or private messages that you receive. For example, Ive seen people on bullboards brag about the size of their position, but never here. I have bragged about the growth of certain positions, but then Ive also lamented shrinkage in positions too (esp. pmt!).

I invest with a certain emotion, but it is not regarding specific companies. It is the emotion related to the macro trendsI FEAR along with many others (e.g., Jim Rogers, Marc Faber, James Turk, Chris Martenson) that fiat money is doomed. Thus, I suppose you could fault me with having an emotional attachment to Canadian oil companies as opposed to greenbacks and loonies.

Also, I recognize that you are trying to capitalize on momentum, whereas I tend to hold based on the long term picture. There is no such thing as a good trade. There is only the right trade for the individual investor who has his own unique set of circumstances and his own strategies.

Cheers, Peter

 

 

Mich

Peter, I always look forward to your feedback on my trades and posts. I appreciate you taking the time to share your opinion with me.

The emotional attachment I am talking about is the kind where someone attacks you for selling a position that he owns. Not the lamenting kind where we feel the need to vent our frustration if our call is working against us :)

Regarding investing in the energy sector, theres no emotions there, just a logical scenario. It is clear that we both are on the same page when it comes to oil gas companies.

Ive seen a couple of comments that appeared a few days after I posted the sale of a stock. Check my last sell of AVF for an example.

Cheers,

 

 

Yeah, ok. I looked at what you were talking about. It may be emotion, but it may also be an attempt to pump and dump. Ive written about pump and dump at my blog. I believe it is something that one has to be wary of but perhaps it should not be a crime not be a crimebut if you do criminalize it go after the big fish, not the minnows like Jonathan Lebed. Pump and dump is similar to a stock tip. It should perhaps be a crime in the case that you beat up one of your brokers for pumping a stock that is not on your list (scene from the Sopranos).

 

 

Mich

Both emotional investors and pumpers share the same symptoms even though its not quiet the same thing :)

 

 

 

Emotional attachment is so easy to fall into. As much as people investing are out there to make money they often pick their investments based on emotion or general sense of the company. At least I do. Making a fully non emotional decision is really hard. I tend to invest in things I care about.

 

 

Mich

I agree with you on the difficulty of making non emotional decisions. Unfortunately, this is what it takes to make it when youre stock picking.

 

 

Great observations! Sometimes I get influenced by very emotional investors. Name callers and personal attackers are easy to rule out. Looking back, I was being swayed by whales when they confidently tout their big numbers. Thanks for keeping me in check!