Overcoming emotional investing

Four years into my career as an investment analyst, I’ve experienced several periods of heavy stock market volatility with widespread macroeconomic uncertainty. Events such as the pandemic and current inflationary spike have caused tunnel vision for many investors, where their sole focus turns to the negativity in front of them and the long-term outlook is forgotten. Market selloffs thrive on this behavior, because rational thought is replaced by emotion and an inclination to go with the herd.

Working as an analyst on an investment strategy, it’s my job to avoid the trap of developing opinions based on the herd. However, this is easier said than done. When a stock in our strategy performed poorly based on a disappointing report or negative piece of news, my immediate reaction was to look for a quick fix. Knowing this wasn’t the proper response, I started to develop a fundamental set of guidelines that have helped me navigate market turbulence and stay level-headed with my decision-making. I’ve found these points to be helpful in all aspects of life, and they can be applied outside the investment industry.

  • Seek out those with more experience than you. Especially when an environment seems to be rapidly changing, it’s important to utilize connections that have been there before. These people can provide a level of context that’s only achieved through time spent in a given field. I’ve been lucky to rely on my portfolio managers with decades of experience, because they can quickly cut through the market noise and dissect what’s really happening. Those with vast experience are likely to have already seen many cycles of volatility in a given industry and can be a major asset in understanding a situation that seemingly has no end in sight.
  • Never stop expanding your knowledge. As I’ve become increasingly familiar with the companies we invest in, my sense of panic when a given stock sells off has deteriorated in lockstep. Understanding the ins and outs of a given business, industry or investment will take emotion out of the equation when there’s a new added risk. If you’ve done the work beforehand, you’ll be confident in your ability to interpret and respond when the time comes.
  • Have a long-term outlook to fall back on. For each company we invest in, we have an investment thesis that includes the merits of holding the stock and a checklist of catalysts that we expect to help the company grow in the coming years. When a negative development occurs, we’re able to use the thesis to easily assess whether our long-term outlook for the investment has been affected by the near-term issue. Staying rooted in fundamental research keeps your ultimate focus away from transitory problems.

Overriding the human impulse to react emotionally when times are bad takes a structured fundamental plan. These guidelines have helped me confidently speak with clients during periods of uncertainty and refrain from overreacting when an event like the 2020 pandemic turns the market on its head.

While I’m happy with the strides I’ve made, it’s as important to continue learning and adapting as new risks come into focus. Each day brings a different set of challenges, which requires constant improvement to the gameplan that governs decision-making when conditions are volatile. Proper preparation and knowledge of your industry can drive confidence in your ability to respond under pressure. ●

Nick Jacobs is Assistant Vice President, Equity Analyst, at Ancora