Successful Investing Requires Emotional Control

 

To be a successful investor, emotional discipline is necessary. Benjamin Graham, in his book, The Intelligent Investor, notes fear and greed are powerful emotions that can drive investors to make poor decisions. When the market is booming, greed tempts investors to chase overvalued stocks. During market downturns, fear can cause panic selling of fairly valued stocks. Graham advises that the intelligent investor must remain emotionally detached and approach investing with a rational, long-term perspective. The investor must perform their own analysis of the value of the company’s stock rather than relying on the stock market to inform them of the stock’s value.

To illustrate the emotional nature of the stock market, Graham introduces the reader to Mr. Market, a fictional character who offers to buy or sell stocks at constantly changing prices. Mr. Market operates at emotional extremes, offering to buy and sell stocks at a wide range of prices based on how he is feeling at that moment in time. Graham urges investors to see this volatility as an opportunity. Investors who maintain emotional discipline can take advantage of undervalued stocks when pessimism dominates. Investors can also avoid buying into euphoria-driven overvaluation. The ability to detach from the market’s emotions separates the intelligent investor from the speculator.

Graham B. Zweig J. (2006). The Intelligent Investor: The Definitive Book on Value Investing. Revised Edition. Harper Business. (Originally published in 1949).

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