Investing With Emotions

Yes, you can do that, and I guess most of you would be thinking along this line: 

“Whoa! Wait a moment! Didn’t you say investing must be done on a rational approach, not through emotions?” 

Good question.

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And my answer is: Correct, investing must still be done rationally, but you can capitalise on others’ (not your) emotions to your advantage.

I had mentioned in the ebook that the price of a financial instrument is determined by its demand, supply and market sentiment¹. The emotional factor would come from the market sentiment part; whenever the market is bullish, prices would naturally go up, and vice versa in bear conditions.

It is at these relative extremities that you can consider how to manage your portfolio; when the markets are deemed to be overheated, you could take off some from the table by selling the overpriced securities. And in downtimes, you can look for depressed counters that are still fundamentally strong but got dragged down by negative sentiments. All these actions are also part of portfolio rebalancing, a key component of my oft-preached diversification.

 

1 – The Bedokian Portfolio (2^nd ed), p124