How to Control Greed in Stock Market

Learn how to control greed in market because greed and fear are emotions that do not allow executing your strategies even though you know what is right and what is not.

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All of us want to acquire as much wealth as possible in shortest span of time. So we look at trading and market as a tool where this can be achieved easily. The misconception of market can help us achieve wealth in short span of time is because of the media that tend to share lot of stories about people becoming rugs to riches overnight because of such investment in market often enough but they don’t lay the complete path of the same person of how he managed to pick those right investments. If we take a look at the complete path of those investments, we would see that it is all about investing in the right stock at the right time and at the right price.

Even Warren Buffet’s way of investment is all about investing in the right stock (or right companies) at the right time and at the right price (as low as it can be) is what makes him what he is today. He finds great business where he can invest and then waits for the right time so when the market gives him opportunities, he invests in them.

Trading is also about finding those right stocks to be trading into and then making the trades at the right time and in the right price. So it is not only important to know the right stock but also investing at the right time and at the right price.

So if you know the right stock, right time and right price, will you be able to trade (or invest) correctly?

The answer is No and the reason the answer is NO because of Greed. Greed and fear are emotion that does not allow executing your trades correctly even though you know what is right and what is not.

So let me share with you how you can control your greed when trading or investing in market.

1. Avoid Get Rich Quick Mentality

Market is for building long-term wealth where you run a marathon, not a sprint.

You hearing people becoming rich overnight may be true but then you have to consider after how many years of experience and hard work did he manage to find way to investing that works for his way of investing in the stock at the right price and at the right time to build wealth for himself.

There are lots of people who may have made a fortune overnight but then it is not just one of fortune that makes him what he is but a systematic wealth-building plan that made him or her that money. News and media will only exaggerate only a segment that is worth mention but look at the whole picture to see how that segment is being formed over and over again.

2. Be In Your Comfort Zone

Many of my blog readers prefer trading in futures and options because in futures, options or even in MCX and bullion markets, people can easily make a fortune overnight using margins but then the risk of margins is you can loose all your capital overnight as well. I don’t prefer trading with margins (See why here) and so I don’t see a reason to be trading in futures and options for any Indian Retail Investor. We can debate about it in some other topic but the point I am trying to make here is – It may be quite enticing for me to be trading in futures and options because being a blogger I should be knowing how to trade in futures and options but then I don’t see myself comfortable doing it and so I don’t trade in futures and options.

Even if I get questions related to futures and options in my inbox like predicting stock market movement based on open interest or call and put ratio. I just let them know that I don’t trade in futures or in options and don’t use futures data to predict stock movement. So though I know how to do the calculations but as I don’t practice trading using those signals I may not be the right person to answer your question.

I don’t see a reason for doing that and unless they have portfolio where buying stocks in cash segment can spike the stock price. By not trading in futures or in options I have a disadvantage where I cannot short a stock. In cash market and I think we have to live with that.

Futures and options is something that makes me uncomfortable and so I am fine trading and investing in cash segment only.

3. Invest in Your Education

Greed creeps in when you have an investment which is riding and you are not ready to book profits.  Each day your view is to see how profitable your trade is and then think of letting the profit ride for one more day. Do you think in such state of mind anybody will be able to sell the stock? I don’t think so because as it continue to rise, selling the next day will always be lucrative and the day the ride stops, the feeling to sell will be too uneasy and many a times the thinking this is just a mild correction and more upside is left comes in and suddenly the stock is where it was aka no profit no loss scenario.

Let the profit ride thinking comes when you are not able to spot more investment opportunities. There is no harm in letting the profit ride but there is strategy of trailing stop loss that needs to be followed to make maximum out of a trade. On top of that if you such opportunities are regularly, you will be keener on booking profit.

If you rely on others to get it done for you, more often than not you will do it wrongly and if it goes as expected, greed creeps in.

4. Follow Single Strategy

If you buy what I told you to, you don’t know why you should be buying and then once it does not work out the way you wanted it to about that stock, you keep that as your investment because you did some research that it is an awesome company.

When you bought it, you did not buy it because it was an awesome company but you had trading levels and targets in mind. There is a different strategy when buying awesome companies. You buy high and sale higher when trading but then when you invest, you buy when you see value in the business and then remain invested for at least 3 to 5 years because that is when the business can turn things around.

There are multiple strategies in market and if your strategy is working stick with it else stick with strategy that works for others and try to follow it. If some strategy that works but is not something you are comfortable in, search for something that you are comfortable.

5. Be in Market to Loose Money

Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market. – Warren Buffet

The above statement comes from one of the best investor on the face of the earth. He is the best in finding stocks and investing as low as he can yet he says you should not be in market if you are not comfortable when your stock goes down by 50%.  So think about traders.

I look at it in a different way. If you make a trade in market, you are loosing the brokerage, STT and many other charges, If you just open a demat account, you just need to paying a yearly fee to maintain it. So you are in market to loose money. You have to make sure you are able to recover those costs from the market.

So once you have a mindset to loosing money, you will be fine hitting a stop loss. Many a times I don’t initiate a trade despite perfect pattern that I am comfortable trading because the stop loss is too steep and I am not ready to loose the amount for a marginal gain or rather I am not comfortable with the ROI (Return on investment) and so I let go the trade.

6. Anybody Can Be Wrong

Anybody can be wrong when it comes to predicting the market. Even Warren Buffet admitted his mistakes about some of his investments. So there is nothing wrong in making those mistakes but then repeating those mistakes over and over again means they are not your mistakes anymore but are a habit.

So if you write your down your trades along with a note about that particular trade or a reason for the loss or profit, you are more likely to find what works for you and what not and you can work on things that does not work for you and try to trade in market with what works for you.

I tried lot of ways to investing like buying low and selling high but then I was not able to hold on my stocks as and when they kept falling and so that style of investment did not work for my mindset. As I logged things, it helped me analyze what works for my mindset and found a solution that best suits my style.

I log the following and when I was developing my own strategies of what works for me and what not I visited my notes very often enough like why I made money or why I lost it. More often about why I lost it and once I knew why I lost it, I made sure to avoid those mistakes from happening again.

Before jumping into market you can try paper trading along with logs and notes.

Conclusion

In market, all the research and thinking should be done before the investment and not after pulling the trigger. When you are trading or investing in market you need to make an educated decision based on a strategy and not a make a wild guess. Share your views in comments below and if you think this article will be helpful to your friends, make sure you share it with them.