April 29, 2011 | In: Opinion

Fear and Greed: The Two Characteristics of Unsuccessful Stock Investors

Investors lose money not because the stock market is bad and not because they’re unlucky (or jinxed, or born under the wrong start), they will lose money when their emotions are either controlled by fear and/or greed.

Let’s start with fear…

Fear in the stock market usually happens when you’re playing with money that not yours or money that you cannot afford to lose. Once an investor is controlled by fear, he loses sight of the basic fundamental of the stock market (it goes up and down, and, on the very long term, it goes up), and starts panicking when he starts losing money on his stocks, until he reaches a point where he lost so much that he decides to sell his stock and probably get out of the market completely. There are thousands of new people who enter the stock market every day, and thousands who get out every day, because they were destroyed by fear. The first lesson that any investor has to learn is to accept loss as part of the game, and maintain high spirits even if his stocks are losing. Fear can be completely avoided by doing the following:

- Trading with money that you can afford to lose (often called risk money)
- Studying the fundamentals (including the technicals) of the stock and the company before buying it
- Buying married puts
- And again, accepting loss as part of the game, and moving forward if you lose money on a stock (think about it this way, if it was guaranteed that people will make money on every stock, then everybody would be trading stocks and nobody will be doing some real, productive work)

I personally did lose money whenever I traded with money that I was afraid to lose. I often panicked, and I sold at a loss.

Greed is another evil vice in the stock trading world. I cannot think of any stock I bought and sold at a loss where I did not make money at one point, and where I thought, hey, let me wait a bit, maybe that stock can go up another 5%, and I will make even more money. Of course, in most cases, the stock gave away its winnings, and lost 5%.

Greed is part of any human’s nature: everyone wants more (and the best) of everything, everyone thinks that if he just waits a bit, maybe he can get a better deal, and while ignoring the good deal that he already had and waiting for the better deal, the person comes to realize that the good deal was actually the best deal, and this is where futile remorse takes place (“I should have sold when I had the chance”).

Here’s how to avoid greed:

- Make a reasonable expectation from the stock (for example, I will be happy with a 2% profit)
- Create a sell on stop condition on your winning stocks if you intend to be a bit greedy. In other words, let your winnings run. As the stock goes up, increase your sell on stop. Get out of the stock when you think that you already made a lot of money.
- Don’t feel regret by selling stocks for a small profit. Remember that there was always a possibility for you to lose money on these stocks.
- Diversify your portfolio.

An investor with no fear and greed will rarely, if ever, lose money on a trade.

11 Responses to Fear and Greed: The Two Characteristics of Unsuccessful Stock Investors

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Is AIG Undervalued? « Fadi El-Eter

April 30th, 2011 at 1:37 pm

[...] stock had 1:20 reverse split since, so it was effectively trading at $10). Yes, that’s the greed (and remorse) in me playing his dirty little game. Sometimes I can’t help it, I’m still a [...]

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Patience: A Virtue That Successful Stocks Traders Are Blessed With « Fadi El-Eter

May 6th, 2011 at 4:43 pm

[...] have written before on fear and greed, and how their negative consequences on the stock trader by distorting his judgment and upsetting [...]

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Top 10 Qualities of a Stock Investor « Fadi El-Eter

May 11th, 2011 at 3:04 pm

[...] He is not greedy: Greed is not the essence of the evolutionary spirit, greed does not work, greed is not right. In fact, greed will make even the most successful trade a loss. Here’s how: A stock investor buys a stock at $20, the stock goes up to $25 in a couple of days (a 25% increase), the investor, because he is greedy, wants more. The stock goes down $7 in a couple of days, and it’ll take ages before regaining that $20 level. A stock investor is not greedy, he sells when he feels he made enough money on the trade, and the definition of “enough” should be conservative. 2% is good, 5% is great, 10% is very risky! But then again, a stock investor knows that… (read the point below) [...]

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LNKD Insider Trades: Jump Ship, LNKD will collapse! « Fadi El-Eter

June 6th, 2011 at 4:51 am

[...] What does that tell us? It tells us clearly that LinkedIn’s executives believe that the stock is overpriced even at $41.85. They didn’t wait until the first day ended, they sold their shares first thing in the morning. It probably came as a surprise to them when the stock went up, 3 times their selling price. Both could have made $14.5 million from that morning trade, but they were satisfied with the $4.83 million (good, they’re not greedy). [...]

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How Can Stocks Make You Money? « Fadi El-Eter

August 15th, 2011 at 9:08 am

[...] – Stocks going up in price and you selling at the right time to make a profit: Good stocks generally go up on the long term. Some have spikes in very short periods (for example, 20 or 30% increase in a few days), and some go up 5% in the whole year. Now when your stock is up, you can then sell your shares in the market and make a profit, but this will forfeit from future dividends, because you will no longer be a stockholder of the company. This is a two edged sword though, as stocks can go down, and substantially as well. Take a look at BAC, the stock of Bank of America, which is one of the biggest banks in the US, the stock went down 46% so far this year. If you want to make money by selling stocks you have to 1) buy stocks in the right industry that is not facing long term troubles and 2) choose the right timing and 3) keep a close eye on your stocks and 4) be patient and 5) never ever be greedy! [...]

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Is Stock Trading a Sin? « Fadi El-Eter

September 3rd, 2011 at 1:04 pm

[...] At one point, most people make money with their stocks, if they are patient and they don’t panic and they’re not greedy. Not selling at the right time is the reason why most people lose money on a stock. Compare that [...]

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Stock Market Best Kept Secrets « Fadi El-Eter

November 17th, 2011 at 3:31 pm

[...] research back when you bought the stock, didn’t you?). You shouldn’t be afraid. Leave fear, greed for other investors and always be patient and [...]

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Canadian Stock Market Outlook 2012 « Fadi El-Eter

December 2nd, 2011 at 12:53 pm

[...] your portfolio, buy low – sell high, don’t trade with risk money, have patience, don’t be afraid and don’t be greedy, and you should be [...]

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When to Dump a Stock? « Fadi El-Eter

December 12th, 2011 at 3:04 pm

[...] been resilient, you were not afraid and were not greedy, and you’ve been patient, but a particular stock that you own is making you lose a lot of [...]

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Are Penny Stocks Safe? « Fadi El-Eter

January 5th, 2012 at 8:05 pm

[...] You are purely driven by greed: There was a time (not too long ago) when investors used to invest in companies that they believed in. Let’s move forward to now, and to your situation, think about it, why are you investing in penny stocks? Do you actually believe in the company issuing the penny stock? Or are you driven purely by greed? [...]

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Should I Sell Stocks to Pay Off Debt? « Fadi El-Eter

February 5th, 2012 at 5:22 pm

[...] In this case, you should do your best to reduce your debt to a manageable level by using all the means possible, including selling all the stocks that you have. One buys stocks to make money and protect himself from inflation, if your debt is causing you to bleed money, then you must use all the stocks that you have in order to settle as much debt as possible. Additionally, if you have unmanageable debt, then most likely you’ll be making all the bad decisions about your trades (for example, sell when you should hold, and buy when you should sell) – this is because you’ll most likely be subject to fear, which is one of the two vices in stock trading. [...]

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