The market is said to be driven by two emotions: Fear and greed. We all want to get rich quick, but these “strategies” are often costly and have detrimental effects on an investor.
The Internet boom in the late 1990’s is a great example of the influence of greed in the market. Investors leaped at the opportunity to invest in an Internet-related stock. Many were even just start-ups at the time. Buying anything that ended in a “dot-com” was at it’s peak, feeding traders’ greed and leading to ridiculously overpriced securities. The bubble burst in the mid-2000 and kept leading indexes depressed through 2001.
Just as the market can succumb to greed, it can also inflict fear. When stocks undergo large losses over a prolonged period of time, the market as a whole becomes fearful of potentially further losses. Fear in itself can be just as costly as greed in the market.
Let me share 3 ways to overcome greed and fear in the stock market.
- Avoid the “get rich, quick” mentality.
Keeping your emotions at bay is a difficult task as a trader and requires a lot of mental work. Having a “get rich, quick” mentality is not the way to play the market.
Many seek out trading the stock market because of stories told of investors who got rich over night. These stories are far and few. The more common story is of the trader who lost it all while trying to win big.
Building wealth is a marathon, not a sprint. Stick to your long-term plan and aim for humble profits. Earning 5% a day with our strategy at Day Trade SPY will double your income in a month. There is no need to be chasing 20% a day for the sake of greed.
- Invest in yourself.
Hiring a mentor, coach or trading school can be costly. But trading unsuccessfully can be even more costly.
As a beginner it’s wise to begin your journey with a coach in order to learn the tools of the trade. Some trading schools simply offer tips, while some offer a wide variety of spreads and strategies, which can be confusing to some. Having a mentor as a beginner can be vital to a trader’s success.
Over time, traders may feel that they have graduated from their lessons at trading school, but having a mentor to continually guide you can act as an accountability buddy. A good mentor will help you through the emotions of greed and fear and advise you stick to your strategy when you’re tempted to veer off path.
Of course, you and only you are responsible for your trades. Sticking to your strategy and long-term plan are vital when dealing with greed and fear in the markets. Having a coach is an added bonus that will keep you in check.
- Stick to your strategy.
Fear and greed relate back to volatility. Investors lose their comfort level when the markets dip or become unstable, they become vulnerable to the emotions of the day and make costly mistakes.
Warren Buffet once said, “Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.”
Buffet showed us how important it is to stick to our long-term plan. He avoided the greedy market during the dot-com boom in the 1990’s and was greatly criticized for not investing in some of the high profile tech stocks. Once the bubble burst, his critics were stifled. Buffet was able to avoid similar losses others were feeling at the time of the burst. He had a long-term plan and stuck to it, regardless of the market’s emotion.
Consider this: you’re driving to the restaurant you have in mind for lunch. Do you pass it in hopes to find a better place? No. You drive to the restaurant, order your food, eat and leave.
The same goes for the stock market. You have a desired percentage to obtain, get in, hit the target, get out. There is no need to ride the trade in hopes to bank a lot more profit (or even a little more profit) – it’s a risky decision that will often leave you in the negatives.
Avoid getting caught up in the market’s daily sentiment and stick to your strategy.