Analysis

By trevor keidan

PHNOM PENH -  Earlier this year billionaire investor Warren Buffett was named the world's richest man by Forbes magazine. He also made headlines last week with his US$5 billion investment in shares of Goldman Sachs. In so doing he managed to inject at least some small measure of confidence into the embattled United States financial system.

However, we can rest assured that Buffett's decision to buy Goldman Sach's shares was a pragmatic one and not an emotional one. And in these uncertain times, we - as investors - should all take a leaf out of the investment guru's book.

When it comes to investing it is time for us to "toughen up". And that is especially true now - even with the United States' government's $700 billion bailout plan for the financial sector. One of the most overlooked facets of investing is psychology. And as investors, we must ask ourselves, "Do we have what it takes to be successful investors?"

When it comes to investing, many of us find it difficult to prepare ourselves psychologically. Instead of becoming disciplined, we become emotional. Our investment decisions are often influenced by feelings of fear, pride and remorse.

As investors, fear can possibly be our biggest enemy. It can make us act irrationally by making us sell (or buy) at the wrong time. This is one of the biggest risks - we as investors - can face.

Managing risk

To be successful investors, we need to make calm, rational and disciplined decisions. In order for us to be able to do this we must have a portfolio that does not carry too much risk. Similarly, we must also have a portfolio that does not carry too little risk.

Unfortunately, it is often people with relatively small amounts of money who take the most risk. Sometimes they feel that they have "nothing to lose" by staking all of their money in risky investments in the hopes of making it "big". Those of us who take this approach are gambling - not investing.

TO BE SUCCESSFUL

INVESTORS, WE NEED TO

MAKE CALM, RATIONAL AND

DISCIPLINED DESCISIONS.

And then there are those of us who are too risk averse. There are those of us who can afford to take a risk to maximise our gains - but do not. Instead we let our fear get in the way and put our money into low-risk financial products that offer regular but low returns. While this is a safe option it might not enable us to achieve our aims. Instead we are wasting the limited time we have available to earn more.

Fear can also cause us to sell when we should hold and vice versa. It is quite common when the market goes through a period of uncertainty - as it is now - that investors are "spooked" into selling. Instead of  "sticking" to a plan (as we should) investors succumb to the negative reports and rumours and sell - often at a loss.

Herd mentality

The "need to belong" is another psychological weakness that can adversely impact our investment decisions. This can be highly dangerous because it can lead us to follow others into a "popular" product. However, we might be buying in at a time when the maximum gains have been achieved and the price is high. Others might well have realised their gains and then start to sell. By the time we realise this and do likewise, the investment has lost its value and we realise a loss. This can be described as the herd mentality (which can also affect stock markets as a whole).

As investors we must also keep our pride in check. Sometimes it is our own personal pride that prevents us from taking what could be a worthwhile risk. When we succeed we are proud, when we fail we feel remorse. In a bid to avoid remorse we may avoid an investment we consider to be risky simply because we do not want to experience the feeling of failure or remorse.

For the same reason we might also shy away from experiences and investments that we have not experienced before. We may consider going into the unknown risk and avoid investing - this could also cost us.

There is no avoiding the fact that there is a lot of uncertainty and market volatility around at the moment. It is how we deal with these market conditions that could determine whether we are a successful or an unsuccessful investor. It will also determine whether we make a loss or a gain.

As investors we should determine our own investment goals and objectives and then determine a plan to allow us to achieve them. Once we have a plan in place we should try our utmost to adhere to it.

Trevor Keidan is managing director of Infinity Financial Solutions. Infinity Financial Solutions provides impartial,  tailor-made  personal financial advice to clients in Cambodia and Southeast Asia. Should you wish to contact Trevor, please send an email to [email protected].  Trevor welcomes comments and questions about his articles or any other financial matters.