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Investor emotions part 3: Remorse

As I’ve discussed in previous articles, the two most significant negative emotions for investors are greed and fear. Either one on its own can lead to people losing money, but more often than not they are combined in an elegant double-whammy that hits some amateur investors so hard that they leave the market with their tails between their legs and never come back. Greed leads them to invest more than they can afford to lose, while fear encourages them to change their strategy on the hoof, without rationally considering the circumstances and the consequences of their decisions, thereby increasing the chances that they will lose. The result is remorse, an emotion that can be either negative or positive:...

posted on: Nov 5, 2007 | author: Alex

Investor emotions part 2: Fear

Fear. We’ve all felt it at some point. The ominous sound of footsteps padding along behind you as you walk back from the pub in a provincial town at 2am on a Saturday night. The realisation that your evil mother-in-law is coming to dinner and you’ve forgotten the steak (not to mention the garlic and holy water). The awareness, halfway through a trans-Atlantic flight, that you’ve left the gas on. The soft ‘click’ as you wake up from your sleep-walk and realize that you’re standing naked in the hotel corridor and the door to your room has just locked itself. Fear. It’s that stomach-dropping, bowel-loosening moment when you realise that you’re about to suffer a deeply unpleasant experience...

posted on: Oct 30, 2007 | author: Alex

Investor emotions part 1: Greed

“Working nine to five, what a way to make a living”, sang Dolly Parton. She was right, too, although today it’s more like “Working nine to six with a twenty minute lunch break, plus the commute, and probably an hour’s unpaid overtime on top and I never get any thanks and my blood pressure’s too high and my back’s killing me and… what a way to make a living.” Either way, working for other people is, on the whole, not the surest route to early retirement on a yacht anchored in the sky-blue waters of the Med. What are the alternatives? Well, you could start your own company (which is hard work), rob a bank (which is not...

posted on: Oct 15, 2007 | author: Alex

Compound interest – what it is, and why you want it on your side...

It’s been said that there are two types of people in the world: those who understand compound interest and those who are doomed to pay it. In this article we’ll investigate what that means and whether or not it’s actually true. First, we need a definition of compounding and compound interest. When your interest is compounded it means that it is added back to your original capital, from which point it then starts to earn interest itself. To clarify this, let’s take as example the unlikely scenario that you find a savings account paying 10% interest annually, in which you decide to invest £1,000. You might initially think that this means you will make £100 in interest per...

posted on: Sep 28, 2007 | author: Alex