“Shark Tank” star and entrepreneur Kevin O’Leary confessed that he once lost $750,000 supporting a friend’s business venture.
“I gave him $250,000,” he said on stage with Grant Cardone at 10X Growth Con 2021. “Sixty days later, he comes back and says ‘I need another $500,000 to make this work.’”
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The businessman admits he went against his intuition.
“I gave him the [cash], he went to zero 90 days later,” O’Leary shared with the crowd. “Please, a moment of silence for that money.”
O’Leary says the experience taught him to never let emotions get in the way of his judgment. It’s a lesson backed by research.
Behavioral economics is the study of human psychology as it relates to decision-making — including within the realm of finance. Understanding how emotions impact financial decisions can help you identify common behavioral patterns and improve your judgment.
Here are some of the ways investors can resist emotional impulses while investing.
Be aware of biases
Over the years, psychologists have identified a number of cognitive biases that impact investors.
Anchoring bias, for instance, makes it easy to misjudge the true value of an asset simply because you’re fixated on past performance. Confirmation bias occurs when you seek out information but focus on that which cements what you already believe. Activity bias makes you feel unproductive when you’re not trading frequently.
Risk aversion is probably one of the most powerful bias investors deal with. The fear of losing money can outweigh the pleasure of gaining it, so decisions are rooted in fear.
Being aware of these elements should help you mitigate their influence.
Read more: Millions of Americans are in massive debt in the face of rising rates. Here’s how to get your head above water ASAP
Stick to the program
One way to avoid emotions is to create an investment plan and stick to it with steadfast dedication. This plan could include a checklist for due diligence and a fixed time horizon for new investments to ensure you’re picking the best stocks and holding them despite volatility.
Integrating a margin of safety is also essential. No matter how confident you are, buying a stock for less than you think it’s worth on the market is usually a good strategy. So is diversification. Having a diverse portfolio can decrease your risk exposure. If a particular stock or industry tumbles, it will affect only a fraction of your investments.
Creating a portfolio strategy could be the key to emotionless and disciplined investing.
Sleep on it
Instead of acting on impulse, when presented with an opportunity, take your time before making a decision. Make a habit of asking more questions and collect as much information as possible. Give yourself a cooling-off period before deciding whether or not to invest.
Doing so will allow you to make decisions with a clear head devoid of urgency.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
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