Investment Psychology: 13 Emotional Traps That Can Destroy Your Stock Portfolio
•By Mahersaham Team
Artikel ini juga tersedia dalam Bahasa Melayu
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Followers of the Efficient Market Hypothesis (EMH) believe that stock prices always reflect the true value of a company. If this theory were 100% accurate, savvy investors would never be able to find undervalued stocks and beat the market. But reality tells a different story.
History has proven that many successful investors have built wealth by purchasing cheap stocks overlooked by the market, then selling them when they become overvalued. So, what truly drives stock price fluctuations? The answer is simple: human emotions.
Fear, greed, overconfidence, impatience, herd mentality — all of these are more powerful than logic. Without humans buying and selling, stock prices would remain flat. This is precisely why investment psychology is a discipline that investors cannot afford to ignore.
In the stock market, emotions frequently overpower logic. When fear strikes, many panic and sell hastily. When greed takes over, they chase hot stocks without considering the risks. FOMO (fear of missing out) compels investors to buy expensive stocks simply because they are afraid of missing an opportunity.
A classic example: before the 1997 Asian Financial Crisis, many were excessively optimistic, pushing the KLCI to 1,270. However, within 18 months, the index plummeted by 76%.
Many investors trust compelling stories more than hard facts. The media and analysts sometimes portray troubled companies as though they still "have potential". Ultimately, investors buy based on narrative rather than reality.
Herd mentality is a major trap. When everyone is buying, other investors follow suit without conducting their own research. When everyone panics and sells, they sell too. But if you merely follow the crowd, it is impossible to outperform the market.
True investing requires time. Yet many want quick profits. Buy this morning, sell this afternoon. As Warren Buffett famously said:
"You cannot produce a baby in one month by getting nine women pregnant."
Opportunities often arise when quality stocks drop in price. However, many wait too long. By the time the price starts climbing, they want to enter — but it is usually too late.
Many refuse to sell losing stocks because they do not want to "admit defeat". The reality is, the longer you hold a declining stock, the greater your losses become. Sometimes it is better to exit early and focus on other opportunities.
Some buy stocks simply because they hope the price will rise. This is akin to gambling. It becomes even more dangerous when they add to their position in a stock that keeps falling — a practice known as catching a falling knife.
Investors often become excessively attached to the stocks they own. They overestimate their value even when the market signals otherwise. As a result, their investment decisions become irrational.
Confidence is necessary, but when it becomes excessive, it is dangerous. Overconfident investors typically ignore risks, neglect research, and dismiss the views of others. When things do not go as expected, significant losses await.
Confirmation bias causes investors to only want to hear good news about their favourite stocks. Negative facts are dismissed, even when they are more accurate.
Many only look at daily prices. They buy based on rumours and sell at the slightest price increase. In truth, quality stocks need time to grow. Focusing on the short term will only cause you to miss out on significant long-term gains.
Ego is an investor's greatest enemy. Many prefer to make excuses rather than acknowledge their errors. Yet mistakes are the best teacher. Investors who learn from their mistakes will become better over time.
Many investors do not understand their own style and weaknesses. Some claim to be "long-term investors" but panic when their stocks drop for a day or two. Others call themselves "day traders" but when they get stuck at the top, they suddenly become "long-term investors". Without self-awareness, no strategy will succeed.
Investment psychology refers to the emotional and behavioural factors that influence investor decisions. It is important because many investors lose money not because they fail to read charts, but because they fail to control emotions such as greed, fear, and overconfidence.
Among the most common emotional traps are herd mentality, reluctance to cut losses, overconfidence, confirmation bias, and investing based purely on hope without solid research.
Investors need to understand their own style and weaknesses, establish a clear investment plan including stop-loss limits, conduct their own research before buying, and be willing to admit mistakes in order to learn from them.
No. Beyond technical and fundamental analysis, investors also need to master emotional control. Without good emotional discipline, even accurate analysis can be undermined by panic or greed.
Master not only investing knowledge, but also emotional control to become a wiser investor.
Open a CDS account through Register CDS Account with Mplus to start investing on Bursa Malaysia.
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