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The Dangers of Emotion in Investing

Here's how to hone in on the 'science' of making money

By Kevin Matras, Zacks Investment Research

http://invstplc.com/1OJ03cj

Like anything in life, to be successful you need a good strategy.

Something as simple as traveling somewhere you’ve never been before requires a strategy (a map or route on how to get to where you want to go). If you want to lose weight, you need to follow a sound food plan to do so. And if you want to make more money in the market, you should follow a proven, profitable method for picking winning stocks.

Following a proven strategy that works can help you achieve your goals. You’re also more likely to stick with it.

As the saying goes: ‘a good strategy works best when you use it’. And the more you use it, the more confident you’ll become, making you that much more likely to keep using it. And that is the recipe for success, especially in trading.

A good strategy can also help you overcome the biggest obstacle in anything you do – your emotions.

Over-Confidence and Under-Confidence

In trading, being over-confident can be just as destructive as being under-confident. Both can lead to poor decision making.

Over-confidence: Did you know the average investor thinks they’re smarter than the average investor? They tend to attribute their stock gains to smart decisions, while attributing their losses to bad luck.

Unfortunately, the opposite is probably true. The majority of their gains could most likely be attributed to luck, while their losses are more often than not the result of poor decision making.

It’s also easy to confuse skill with a bull market. A lot of bad decisions can get rewarded when the market is going straight up. But, when the cake-walk stops, those bad decisions can ruin your portfolio.

Under-confidence: Constantly second-guessing yourself is no better. Too many investors, after finding a good stock, will try to overcome their feelings of self-doubt by over-researching a stock to find additional reasons to buy. Invariably, they will come across something that causes them to feel even more uncertain, and they’ll talk themselves out of the trade altogether, only to eventually find that the stock had run up as expected, and you’ve missed the whole thing.

Vowing to not let that happen on your next pick, you decide to plunge right in after you’ve found your newest stock. (You don’t want to talk yourself out of it like the last time.) This time, however, the stock drops after you get in, and you immediately regret your decision.

So the next time, you tell yourself you’ll be more diligent, and turn over every stone before your next trade. But, of course, you find yourself back in the same position as the first time, with information overload, and self-doubt, which eventually leads to the same poor result as before.

Being sufficiently confident (not too much and not too little) all boils down to knowing what works, and then doing what works…

Zacks’ “Black Box” Strategy Quadruples S&P 500

Zacks has developed a secret formulation of stock traits that has tested off the charts. Over the past decade, this computer-driven strategy was shown to more than quadruple the average yearly gain of the S&P 500 at 27% less downside risk. In fact, from 2005-2014, it beat the S&P 500 every single year.

It even outperformed our Strong Buy stocks more than 1.5X over. Only a few investors will share the 10 live picks of Zacks’ most exclusive portfolio.

See these amazing stocks >>

The Science of Making Money in Stocks

Nowadays, the most successful traders use computerized models to know what strategies give them the greatest probabilities of success.

Traders create algorithms (strategies) using various criteria to select stocks. Through backtesting, they are able to see how their strategies would have performed in the past so they’ll have a better idea as to what their probability of success will be now and in the future.

Past performance is no guarantee of future results. But what else do you have to go by?

Think about it. If you saw that a stock picking strategy did nothing but lose money, year after year, stock after stock, over and over again, there’s no way you’d want to use that strategy to pick stocks with. Why? Because it has proven to pick bad stocks.

On the other hand, if you had a strategy that did great year after year, trade after trade, over and over again? You’d of course want to use that strategy to pick stocks with. Why? Because it has proven to pick winning stocks. And while it could start picking losers all of a sudden (now that you’re using it, right?), it may also continue to pick winning stocks, just like it had been doing over and over before.

Of course, a winning strategy won’t preclude you from ever having another losing trade. On the contrary, even the best strategies ‘only’ have win ratios of 60%, 70% or even 80% (not 100%).

But if your strategy picks winners far more often than losers, you can feel confident that the next stock it picks will have a high probability of making money. And you’ll have the confidence to take it.

He Who Hesitates Is Lost

Once you know all the ins and outs of a strategy, you never have to second guess yourself.

And why would you? If you have a proven strategy that has outperformed in both bull markets, bear markets, and everything in between, you can feel confident that the best research has already been done to put those stocks on your buy list (or sell list) in the first place.

Because the 50-100 hours of testing that went into creating that strategy, is unlikely to be outdone by reading one extra news story, or looking at one more chart, or stressing over something in the market.

And that’s the point. Imagine devoting 100 hours of your best thinking to EVERY stock you thought about buying. You’d feel pretty confident about that pick. And that’s what a thoroughly tested strategy can provide – the best time-tested analysis applied to every stock that comes through, each and every time.

And it also strips away the human bias that hurts so many traders out there. No more stressful emotions and no more indecisive ‘hemming and hawing’.

Peace of mind. And a more profitable portfolio….

Emotion-Free Trading Today

We’ve created such an approach with our new strategy that incorporates Zacks Rank #1s, the top Zacks Ranked Industries, and a special combination of various Growth, Value, and Momentum style inputs that have shown extreme profit potential.

We call this secret formulation the Zacks Black Box Trader.

Best of all, there is no human bias to this computer driven and operated strategy. Just a straightforward, quantitative model that has tested off-the-charts, beating the S&P in 10 out of the last 10 years, more than quadrupling its returns with an average annual gain of 31.9% vs. the S&P’s 7.5% over that same time frame. And with less risk while doing so.

Black Box applies the best time-tested analysis to every stock that comes through. And it automatically does this each and every time so you don’t have to. Every Monday, you’ll be signaled which stocks to buy (and which to sell) with the highest probability of success. Remarkably, it only takes a total of 5-10 minutes trading each month to enjoy the gains.

Whether you’re a seasoned trader or brand new to the market, I know you’ll enjoy approaching the market in this entirely different and unbiased way.

Please note that the Black Box is not only one of our newest and most exclusive strategies, but it is also generating an extraordinary level of interest among Zacks members. Its latest stocks will be released this Monday, December 7 at 10:05 am ET. Be among the first to see them . . .

Get details on our Black Box Trader right now >>

Thanks and good trading,

Kevin

Zacks VP Kevin Matras is our stock screening expert. He developed many of Zacks’ most powerful market-beating strategies and created the exclusive Black Box Trader. 

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Article printed from InvestorPlace Media, https://investorplace.com/2015/12/dangers-emotion-investing/.

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