Reading Emotions Is More Important Than Fundamental Analysis
Level 1 - NGMI
Welcome Avatar! We’re sure you’ve heard of all the classic investing mantras. “Be greedy when others are fearful and be fearful when others are greedy”. “Markets transfer money from the impatient to the impatient” So on and so forth.
While traditional financial classes will teach you meaningless things like the discounted cash flow analysis and how to run a comparable company analysis, reading emotions is 100x more important.
Simple proof point. Would you rather know the earnings call next quarter or know the total number of buy orders (and amount) vs sell orders (and amount) for the next quarter. Everyone knows the answer is *number of orders*.
What People Think vs. Reality
Most people think investing is about intelligence and “running numbers”. They see all of these stories about algorithms that guarantee profits. Some new valuation that is revolutionary etc. In fact, we have even seen companies built on theoretical numbers (OpenDoor for example).
Complex spreadsheets and forecast models are more fictional than Harry Potter books. They don’t work.
Reality
In the end, for a stock to go up or down someone needs to click the red sell button or click the green buy button. It doesn’t matter if there is news or no news. If more people click green, price goes up. If more people click red price goes down.
This is exactly why you get large opporuities every single year. On the paid side we explained several emotional ones this year already: 1) Tesla meltdown, 2) fake Iran Scare and the recent 3) job revision scare. When volatility spikes, and your portfolio is up or down, fear and greed enter the system. This isn’t a calculation in excel it is a reaction to an emotion. Every single time.
80% Emotion, 20% Analysis
Investing is about 80% emotional. If you did the research and know Company A is going to be used 100x more in 10 years, why would you ever sell if they have a bad quarter? You’d be surprised. The majority will sell.
That’s why investing is 80% emotional. The other 20%? Making sure you invested in something that is going to grow over the long term.
Are people going to shop online or at a brick and mortar
Are people going to buy more digital gold or physical gold 10 years from now
Are people going to pay payment processors 2%, 5%, 10% to send money around the world
Are women going to spend less money on skin care, wellness, clothing?
Are we going to use less technology in the future?
As you can see, you can take two different people. Same information, same world view and same capital. One makes life changing money. The other gets wiped out. The difference is not IQ or information. The difference was emotional stability.
If you're constantly changing your world view outlook because of some new tax or bad quarter, you don’t have emotional control. Flipping positions because of some post on X or checking your portfolio every day is not healthy. You're creating emotions (anxiety, fear, greed etc.) which is never going to help you remain even keel when everyone is celebrating or crying.
How to Train This Muscle
On the paid side we actually got a question about this. How you develop this general feel. We have no problem spelling it out because no one will actually do it anyway. It’s easy to understand but nearly impossible to implement. For fun we’ll lay out a few queues.
Are you selling because of bad news or good news. If the answer is good news that is *more* logical. It means you think too much of it is now priced in
Does the new information change your outlook for the next 10 years? If it does not then you shouldn’t do anything. This applies more to stocks than anything else. If you sell Big Tech, you need to have a reason to explain why tech *won’t* be used more in 10 years. QQQ would be a good example of that
Who is saying to buy/sell. If it is mainstream media or someone at the local barber shop, then you’re much more likely to be correct if you’re doing the *opposite*. Anyone in the mainstream is going to mirror the average person. The average person underperforms the market consistently over the long term
Speaking of mainstream, that would suggest a celebrity, president etc. is a reason to *sell* not a reason to buy. If you see people on Saturday Night Live recommending the company you own in your RobinHood account… time to head for the exits
There is no automation for this. No app. No step by step guide to fix it.
Emotional discipline is built through investing, personal life and even as a boss/employer. There is a reason why CEOs are pretty good investors. They are good at reading emotions.
You earn all of this by surviving volatility and by getting burned a few times.
Most people simply say “I coulda shoulda woulda”. The smart ones reflect back with self awareness and say “how did i feel at that time”. If you’re being honest with yourself, you’ll recognize the emotional state you were in (either high or low) that caused you to make the bad decision.
When It Comes to Investing Be Cold and Robotic
Sound terrible? Great. Welcome to the big leagues.
Your employer would love to fire you. Instantly. You’re just a cost and impact him negatively. The only way you are valuable is if he is paying you *less* than you are making the firm. Otherwise the firm would go out of business.
Now apply this to investing. If you have no emotions, you’ll become a significantly better investor. Instead of investing based on how you feel or how the population feels, you’ll invest based on *who* is involved. If Warren Buffet just bought the stock, probably a good sign. If the guy who sold marijuana at your high school is pitching you the stock… not great.
Most people create emotions for no reason. They get “hyped” about the last investment they made. Being hyped about something is an emotion. Not great.
Instead you’re going to analyze how you personally feel before you make an investment decision (buy or sell). If you’re in a neutral state you have a clean slate. If you try to invest/sell/buy when you recently got promoted, lost a job or saw a headline on CNBC… BBQ chicken.
Almost nobody does this. That’s why almost nobody wins.
You are already smart enough. You know what the world is generally going to look like in 10-15 years. The question is if you have the emotional stability to remain neutral.
Most? Just going to be exit liquidity and expect to shoot 100%. Doesn’t work like that.
And remember. It’s always better to be born lucky vs. born smart. Lady luck goes for people who are care free
Disclaimer: None of this is to be deemed legal or financial advice of any kind. These are *opinions* written by an anonymous group of Ex-Wall Street Tech Bankers and software engineers who moved into affiliate marketing and e-commerce.
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