Buying and selling on emotions

Warren Buffett is famous for reminding investors that their emotions are their worst enemy.

The safest way to make money is to buy an asset (i.e. stock, bond, real estate, or commodity) when its price is significantly below its real value and sell it when its price is significantly above... easier said then done.

Even in the bull market of the 1990's, both professional and individual investors significantly underperformed the market because their emotions made them take actions that were contrary to their own best interests.

While it's difficult to identify your own emotions, identifying their characteristics may prevent you from making some of the most common investor mistakes.

Love - asset price doesn't matter, valuation doesn't matter, recommendations don't matter, "I'll never sell."

Greed - asset price moving up rapidly, stock overvalued, on everyone's recommended list, buy at any price, "when the ducks are quacking, feed them."

Excited - asset price starts to rise, stock slightly overvalued, some positive some negative recommendations, planning to buy on a "pull-back."

Apathy - "dead money," asset price moving "sideways," fairly to slightly overvalued, no recommendations, looking for something else to buy.

Disgust - "cut your losses," asset price starts to move down after a period of apathy, fairly priced, some positive some negative recommendations, planning to sell when stock returns to predetermined price.

Fear - stock falling rapidly, lots of negative recommendations, sell at any price, "there's blood in the street."

Hate - stock price doesn't matter, valuation doesn't matter, recommendations don't matter, "I'll never buy."

Quoting Buffett, "you pay a high price for a cheery consensus."

Given the same asset, the time to buy is when everyone fears and hates it, and the time to sell is when everyone is in love with it. You can pick up on the emotions from the media, analyst recommendations, and, yes, blogs.

If you can't determine the value of an asset or if you can't control your emotions (buying when there is fear or selling when their is greed), get the help you need from an advisor that can.