SCOTT REED: Emotion has no place in investing

Scott ReedThe absence of greed and fear are great qualities for an investor. Both get in the way of a good investment portfolio.

We have heard many times that greed and fear in others should be taken advantage of by the smart investor, but we don’t often turn that around so that it faces us in the mirror.

Lord Byron said, “Buy when there is blood in the streets.” Even harder than that statement is the other half of the equation: “Sell when everyone is making a killing.”

And even harder still is to be satisfied with the results. A good friend of mine bought a stock a few months ago, not because he had done exhaustive research, but because he loved what the company did and what they stood for.

Sometimes a basic gut feeling works just fine. My father bought some stock in Wal-Mart in 1987 when he was president of our family owned department store. When I asked him why he purchased the Wal-Mart stock, he said, “I drove through their parking lot today and if they are going to put us out of business, I would at least like to own a little bit of their stock.”

It was a good buy and good insight. Wal-Mart didn’t put his company out of business, but they tried.

But back to my friend. His was a good stock purchase decision as well. He bought a company he wanted to own. His goal was to eventually make enough money to fix up his boat and he made that money in three months. The stock soared; it performed beyond his dreams. He sold the stock when he had enough money to fix his boat. What could be better than that?The investment worked perfectly.

The problem is that the stock had the gall to continue to go up after he sold it. What a betrayal; how could an investment be so insensitive? In the next month, the stock price rose another 20 percent, and my friend was miserable about it. He felt he should have kept the stock. He should have known.

I asked him if he thought the stock price was high for the value of the company. He said, “Obviously not.” He also admitted that the company really hadn’t made any money yet and that most people owned it based on what they thought it might do. So, in other words, there was little intrinsic value for the price. I tried to make him feel better. That was a hard conversation because he should have felt better on his own. He said at one point, “I wish it had gone down so I wouldn’t have felt so stupid for selling it early.”

Now you may laugh at that, but that mentality permeates the investing world. People are not required to make sense in order to buy and sell securities. They just have to have the money for the transaction. If you are like my friend and can’t take the emotion out of the trade, try this: Put your investments on paper. Change the names so you have a harder time getting attached. Then make a decision on what you need to do.

Leave your emotions at home where your children, your spouse, your dog or your cat can really make use of them.

Scott Reed is CEO of investment advisory firm Hardy Reed in Tupelo. Contact him at (662) 823-4722 or sreed@hardyreed.