Emotional Behaviour in Investing - Capitulation & Despondency in Focus

We are going to take a break from the recent valuation and execution articles I've wrote on quite a few recently.

Today, we will be discussing about theemotional behavioural part of investing- an aspect that most of investors took it for granted until things turned otherwise for them.

This is the third time in as many posts recently that I've used the same image that depicts the 15 stages of emotional behaviour cycle of an investor.

In order not to make the article overly extended, we'll be focusing on the down cycle of the behaviour as highlighted in the red box below.

If you have been investing for a long time (usually more than a decade), you would likely have gone through all the15 stages of emotionalroller-coaster - even though you may not actually realize it.

The typical behaviour of an investor (even for gambler) always stems fromoptimismat the very first.

You rarely see someone going in to invest in the market or going in to the casino thinking this is the amount I am ready to lose today. Not many will do that.

In most cases, you get people pumped up ready to make this their new resolutions of the year, thumping chest and fist to the sky that this will be the very new start of their long journey.

Investors get excited most when they make money.

This makes them feel good about what they do and think that they know everything that they know and even have a grasp understanding of what they know that they don't know. This is depicted as point C and D.

The margin of safety concept for the most part of investing is meant to cover point A - the "I don't know what I don't know" but most investors do not give a proper consideration for as long as the market is going up and they are making money.

Drizzle is a light precipitation of liquid water drops that is smaller than a normal rain.

We are depicting that as thedenialin the stages of emotional investing.

Stocks go up and down every single day and minutes so it is no worry that investors see movement in their portfolio for as long as the threshold is within their level of acceptance.

Next, the rain comes.

Investors go through theanxietyand a little bit offear, revisiting their beliefs and threshold to see if they are still comfortable handling with it.

In the stock market, a correction comes from time to time when the market will fall but still maintain the overall upward trend in general. In other words, an investor would feel the anxiety and fear on a smaller scale but it will usually pass rather quickly before they are ready to take the next action. This phase doesn't usually last very long.

Then, a big sound of thunder comes rumbling down, sending warning that a heavy flood is about to take place.

When the market goes into a fast and furious mode with heavy volume of selling, that's when we likely see blood on the street.

At this moment, investors are likely feeling very nervous during thiscapitulationanddespondencyperiod, either because they kept on seeing news that are not giving them any sort of hope because of the relentless bad news one after another but also mentally injured as they see their portfolio plunge in value.

That feeling exponentially goes up in multiple aptitude when you have run out of cash or worse still if you are leveraging irresponsibly.

No one probably bothers or read anymore about what valuation model I am using to value the business or what sort of growth earnings that the company had recently announced.

These investors just wanted redemption - a chance to redeem themselves out and they would promise to no longer touch the stock market (or Chinese market or whatever future market that will bleed on).

Thankfully, it is not the end of the world.

If you manage to survive till this point, then give yourself a huge pat on your back because you have managed to walk through almost the entire cycle of investing emotional behaviour - including some of the most difficult one and not just the easy part.

Not many investors can emotionally go through this entire cycle successfully so they are not an easy one to achieve.

Last but not least, I want to leave you with a quote that resonates very much with me and something which I'd like to share with my readers.

"If you want a rainbow, you have to deal with the rain" -- Dolly Parton

I'll add in an additional thunder and flood, if you will.