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Quite a few years a go, my Dad decided to buy some stocks. It was a parcel of 5 stocks. The idea was to hopefully see some medium term gains, maybe over 6 to 12 months, but there was one problem. He could not take his eyes off the computer screen. Here was a man co-operating a coffee shop with his wife and watching the charts of the 5 stocks he had bought, on a daily basis.
So what are the problems with this?
Let's just say though that there are many who are reading this and saying to themselves, 'been there and done that', and there will be other's who just simply know that this has a negative impact and wont do it. But what drives people to do it? If we can answer this, then maybe we can stop people from doing it, but first of all, let's examine why it is wrong.
Our minds have receptors, and for the sake of this article, we are looking at the receptors in our mind that are receiving the emotional impact caused by what we are seeing with our eyes. It is fact that a negative experience has more of an emotional impact on us than a positive experience, and that you can't 'even the ledger', after experiencing a negative, by then experiencing a positive. According to some behavioural economists, the impact of a negative experience can be up to 2.5 times more powerful than a positive one.
Now let's take my Dad and his stocks. Out of those 5 stocks, one did extremely well, and the rest either lost a bit or broke even. In the end he was up, but the emotional roller coaster ride he went through, for those few months, put him off ever investing (or trading) in stocks again. Why?
His goal was to have an appreciated asset by the end of 6 months, which he did have, be it only after about 3. So why on earth did he have to look at the stocks everyday, and not just once I might add, but every 5 minutes? Only he knows, but there could have been a myriad of reasons.
One, he was secretly hoping that one or more of these stocks was going to fly to the moon, well above anyone's expectations, and when it did, we was going to be there to take the cake. Two, he was worried that one or more of these stocks was going to tank, go broke, clean him out, and he wanted to make sure he could see the writing on the wall before it took him out. Three, he just simply didn't trust his money being managed by someone or something else, and the only way to be at peace was to ensure it was still there (every 5 mins!!)
Whatever the reason was, he felt compelled to watch the screen day in day out, and when you compare this to his investment goal, and time frame, the price fluctuations on a day-to-day (or intra-day) basis, are merely noise and randomness. They are nothing more, but the problem with this noise is that, even if the down ticks equal the up ticks, every single one of them is sending an electrical impulse to his receptor, as an emotion, and if the behavioural economists are right, then every day he has suffered 2.5 times more negative emotion than positive. Is it any wonder after 3 months he was tired and worn out? He was emotionally drained.
