Did you know that your emotions play a major role in the financial investment decisions you make?
In fact, your emotional biases are so strong they can cause you to overlook logic and reason. Think of it this way: Whenever there is some sort of financial craze sweeping through the market, you will discover that most people are being influenced either by greed or fear. These two emotions tend to control market demand and supply. As a result, many people fail to make sound decisions and lose a lot of money in the process.
When you are emotional about something, you become irrational and lose your sense of objectivity. Yet every great investor can testify that objectivity is critical to making smart financial decisions. Do you see why emotions and money should never mix?
You don’t even have to look far to find clear evidence of emotional investing. Here is a short list of infamous financial bubbles triggered by emotional investing:
- Tulipomania (1634-1637) – When Dutch high society began displaying tulips as a status symbol, speculators rushed in, bought tulips, and began selling them for higher prices. Soon enough, everyone else jumped onto the bandwagon. Tulip prices peaked and then imploded, bankrupting speculators and the Dutch economy.
- Railway Mania (1840s) – Britain began developing new railroads at a fast rate. Since railways were a disruptive technology at the time, over-exuberance took over and investors rushed to buy stocks in railroad companies. The share prices soared and railroad companies ended up overbuilding railway lines. Ultimately, the bubble popped, railway stocks plummeted, investors lost everything, and railroad companies went bankrupt.
- The Dot-Com bubble (2000) – Investors plowed cash into internet startups as technology stocks soared. Everyone believed that technology would create a “New Economy.” Despite the fact that most of these Dot-Com companies were posting negative earnings, investors ignored the risks and rushed to buy the stocks. When the tech stock bubble burst in early 2000, the US economy plunged into a recession.
- The sub-prime mortgage crisis (2008) – When house prices began declining in 2004, lenders began giving mortgages to families that were previously unable to qualify to buy a home. Consumers were so happy because they were finally able to become homeowners, with some buying several houses. What most didn’t realize was that these ‘subprime’ mortgages offered low interest rates for the first few years. After that, the rates skyrocketed. By 2006, interest rates shot up and homeowners realized they couldn’t pay their mortgages. Millions of families lost their homes due to foreclosure and lenders all over the world were left holding worthless debts.
Today, everyone is singing the praises of Bitcoin investments. Like clockwork, history always repeats itself, yet do we learn from past mistakes? Only time will tell!
Think Value, Not Money
Whenever people become obsessed with something, they unconsciously assume that the object of their obsession has value. But here’s a simple truth: Money is not the same thing as value! Money is simply a tool. There was a time when clay tablets, salt and even cowrie shells were used as forms of money. Times have changed, and these items no longer have the value they once held. Paper money is no different. It is merely an instrument and going by history, it is dangerous to place value on something that is replaceable and constantly changing.
So what is the solution?
You need to learn how to become indifferent toward money. Now don’t get me wrong. Feelings are perfectly normal. However, when you are investing, you have to stay rational and follow a financial plan that leads you toward your goals.
Instead of hoarding money out of fear or greed, find a way to create real value so that you begin to attract money. Value is the new money. If you build an infrastructure of value, then the money will continue to flow in. This will allow you and future generations to access even more value in the years ahead.