How To Overcome Emotion As An Investor

By Jesse Wayne

As human beings, we have emotions that cannot be turned off. Whether you want them to exist or not, there’s no way to prevent emotions from surfacing. Emotions are for the most part, extremely useful tools that have helped humans survive for millions of years. Take fear for example – when something terrifies you or threatens your life, you want your body to enter a state you never thought possible. Super strength and lightening quick reflexes are welcomed responses at this point.

Emotions are WORTHLESS as an investor.

Before typing that statement I thought long and hard about its validity. In school, you’re taught that phrases like always and never are giveaways to a statement being false. Not often is something always or never true. In this case, it is.

Fear, excitement, joy, regret, etc. – all have no use to an investor. Why would these emotions matter? There are thousands or perhaps millions of people holding the same position as you. Some have profited, some have lost money and others have broken even. That means that some are happy, others are angry or sad and the rest are indifferent. Several different emotions and the stock can still move in one only direction.

Not Just People Invest Today
Introduce machines into the equation and emotions become even more irrelevant. Whether you like it or not, machines have become a significant force in the market. From advanced algorithms set up to scrape tenths of a penny to robust systems that can buy and sell millions of shares in a matter of nanoseconds, they all share one thing in common – the absence of emotion.

Cool, Calm and Collected
As an investor, you must be cool, calm and collected. The ability make rational decisions about what to buy and sell can become your most valuable tool. Emotion actually makes you weak and exposes you to judgements that would normally not make sense. If you absolutely know that a stock is oversold and will move upward soon, a drop in price lower than your purchase price can cause a gut reaction to sell.

So how do you avoid trading based on emotions? How do you prevent yourself from panicking when you’re fearful that you might lose a good chunk of your net worth? You have to learn to recognize your emotions and address them accordingly. That’s exactly what this infographic will help you do.

Think, Don’t Feel, Before Trading
By identifying your emotions and how they may impact your actions, you can apply rational thinking to your situation. For example, if the stock you own comes out with negative earnings and declines 4% as a result, stop and think before you hit that sell button. You obviously thought the stock was a good investment before declining in price, so evaluate the recent earnings announcement and determine whether or not OTHER investors are overreacting. Chances are, if you thought about selling immediately in an attempt to minimize your losses, others have done that exact same thing. I can’t count the number of times I've seen a stock take a huge haircut only to rally and regain much of its losses by the end of the day.

That’s not to say that you should never sell a stock if it’s up or down in a big way, just don’t make that decision based on joy or fear.

READERS: When did you overreact based on emotions only to regret your decision afterwards?

Source: http://visualfin.com/

Quote for the day

“Liquid markets are, by definition, traded by a large crowd of traders. Although it is nearly impossible to determine what a single trader will do, it is possible to determine the statistical probability of what a large crowd of traders will do. Mass crowd psychology comes into play, the result of mass human emotion as it swings from fear to hope, and back again.” - Rich Swannell

11-Jun-2014 CSE Trade Summary

Company Fact Sheet: Hapugastenne Plantations PLC - HAPU:N0000

About the company:

Established: 1992                                        Quoted Date: 1998-03-25                  Sector: Plantations

Hapugastenne Plantations PLC (HPPLC) is a Sri Lanka-based company engaged in the cultivation, manufacture and sale of tea, rubber and other agricultural produce. The Company's plantations are situated in the planting districts of Ratnapura, Badulla and Monaragala. During the year ended December 31, 2013, the Company produced 8 million kilograms of tea and 1 million kilograms of rubber. 

As of December 31, 2013, the Company's parent undertaking was James Finlay Plantation Holdings (Lanka) Limited, and its ultimate parent undertaking and controlling party was John Swire & Sons Limited. 

As of the same date, HPPLC had two subsidiaries within the group, the Company has 54% holding of Newburgh Green Teas (Private) Limited engaged in manufacturing and sale of Green Tea and 51% holding of Finwood Lanka (Private) Limited which has ceased its operations since 31st December 2011 and a special resolution has been passed by its shareholders on 30th December 2013 for a reduction of capital to zero.

Chairman: Mr N.K.H. Ratwatte 

Board of Directors:
Mr E.R.Croos Moraes 

Mr M. Vamadevan 

Mr J.M. Rutherford  (Non-Executive Director)

Mr J. Molligoda 

Mr R.J Mathison 

Mr D.H. Madawala 

Mr R.A.D.R. Ramanayake 

Mr A.N. Wickramasinghe (Non-Executive Director)

Mr S.C. Swire  (Non-Executive Director)

52 Weeks Low: 26.30                                                                        52 Weeks High: 38.00

Average Trading Volume: 344

Company Financial at a glance:

Click Table to Enlarge

Notes:
1. 20,000,000 Ordinary Shares of the Company were allotted on 18th August 2000, pursuant to a 1:1 Rights Issue @ Rs. 10.00.
2. On January 1, 2001 Debentures to the value of Rs. 150 million were converted to 6,315,789 ordinary shares at the par value of Rs. 10 plus a premium of Rs. 13.75.

Total shares in Issue: 46,315,789

Top 20 Shareholders as at 31/03/2014

The percentage of Shares held by the Public as at 31st March 2014 was 8.17%.

The percentage of Foreign Holding as at 31st  May 2014 was 23.43%

Quote for the day

“Most novice traders have the tendency to take small profits and large losses. Therefore, the more trades you make, the more you will lose.”  - Chris Lori

Revealed: The world's cheapest stock markets

Analysis for the Telegraph highlights the cheapest stock markets - and shows how to back them

Click image to enlarge

Buy low, sell high. It is a simple formula for investment success, but with so many ways to measure a market, and with conflicting results, following it can be difficult.

To help, we today highlight three closely watched valuation measures, and others that are growing in popularity.

Price-to-earnings ratio

We start with the most widely used calculation. The p/e ratio compares a company’s value with its profits. To work it out you take the share price and divide it by the annual earnings per share figure. Another way to look at it is that if the company is valued at £10bn and makes £1bn in annual profits, its p/e ratio is 10.

The lower the figure the better. With stock markets, you would compare the p/e with other countries, or with its own long-term average. With shares, you compare it with rivals. For instance, if the average p/e for all bank stocks is 15 and your bank stock is at 10, you may have a bargain.

Cape ratio

It has a daunting title – “cyclically adjusted price to earnings” – but the Cape is growing in popularity. Essentially, it is the p/e ratio with a twist. Instead of using earnings over 12 months, this valuation measure takes the average earnings figure over the previous 10 years.

In doing so the Cape ratio strips out short-term anomalies. One of the main criticisms aimed at the p/e, the more basic measure, is that a market could be deemed “cheap” because earnings have just reached their peak in the economic cycle and are about to fall. By taking the average for 10 years, the ups and downs of the cycle are evened out. It was first dreamt up a generation ago by investment gurus Benjamin Graham and David Dodd and refined by US academic Robert Shiller in the Nineties.

This measure, though, does have critics. Richard Troue of Hargreaves Lansdown, the fund shop, said: “It can be slow to acknowledge genuine stock market shifts. For instance, Japan’s collapse into deflation and stagnation took years to be fully acknowledged.”

Price-to-book ratio

Rather than focusing on earnings the price-to-book ratio examines how a company’s market value compares with the value of its underlying assets – the value of all the buildings, machinery and intangible assets if sold today.

To calculate the price-to-book ratio for the whole index you need the value for each share. A low score signals that a stock market or share is undervalued. A figure of less than one is viewed as a bargain, as it means investors are buying at a discount to the value of a firm’s assets. But bear in mind it could be cheap for a reason.

According to Miles Standish, managing director of Fisher Investments UK, this measure is more useful because some firms manipulate their earnings figures, which can distort the average valuation for the entire stock market.

“The book value cannot be manipulated, but there are plenty of ways for earnings figures to be fudged or glossed over,” said Mr Standish.

Best of the rest

Perhaps the most basic way to gauge the value of the stock market is to look at the dividend yield.

This is the income investors receive from shares, expressed as a percentage of the share price. As a rule of thumb, if the stock market yield is higher than a country’s government bond yield then investors should buy. This has been the case in Britain for five years (today it’s 2.7pc for 10-year bonds versus 3.5pc for the FTSE 100), although critics point to the distortion created by the Bank of England’s stimulus efforts.

A lesser known measure that is gaining more prominence is the “Q ratio”. This compares the market value of a stock with the company’s replacement cost, in other words what it would cost to recreate its business.

Mr Troue said this was useful for markets such as Britain and the US where there is plenty of data available, but for emerging market nations such as China and India, where data is not as widely available, it does not work so well.

Another less familiar ratio that some experts use is the inverse p/e ratio or “earnings yield”. Flip the normal p/e calculation upside down and divide the earnings by the share price. This serves as a useful comparison with government bond yields as it assesses whether investors are being compensated for holding shares as opposed to bonds.

Warren Buffett has his own favourite. He values the market by comparing its total value with the country’s economic output to assess whether it is time to buy more shares or cash in.

The countries and markets where it’s currently best to invest

Experts all have their own favourite valuation methods. Rather than getting too involved in the endless debate, Your Money looked at the three main measures of value – the normal price-to-earnings ratio, the cyclically adjusted price-to-earnings (or Cape) ratio and the price-to-book ratio – to work out whether a stock market was cheap or expensive.

We looked at 34 countries and assessed whether they were currently trading above or below their historic average, using all three valuation metrics.

The cheap stock markets

To be named “cheap”, markets had to be trading below their own historic valuation across all three measures. As the map to the left shows, only a handful of stock markets managed to achieve this feat – Greece, China, Hong Kong, India, Japan, Russia and Turkey.

Some stock markets will be cheap because the countries are in the midst of economic turmoil – this certainly rings true for Greece and Turkey, which both have fragile economies. Highly indebted Greece, in particular, has been trying to get its house in order.

The risks are great but investors could make big returns given that the valuations are so cheap. The Argonaut European Alpha fund is heavily invested in Greece while an HSBC ETF tracks Turkey at a cost of 0.6pc a year.

Sometimes markets are cheap because of political uncertainty. Russia certainly falls into this category. This is not new, as Russian shares have been prone to political tensions for years. But the dispute with Ukraine means they are the cheapest in the world on the price-to-book measure.

Long-term fans of emerging market nations – China and India, for example – may be tempted to invest more money. Both nations scored well. The First State Asia Pacific Leaders and Newton Emerging Income funds are favoured by brokers. Among investment trusts, JP Morgan Global Emerging Markets Income is highly regarded.

The expensive stock markets

In red are the countries that scored badly on all three metrics. America, Sri Lanka, Pakistan and Indonesia are all trading on valuations that are higher than their historic averages across each of the measures. Investors are buying high.

The main reason for the lofty valuations is that these stock markets have performed well in recent years. This pulled in other investors and has left these markets substantially overpriced.

In America, for instance, the two main stock market indices – the S&P 500 and the Dow Jones – have set new record highs on several occasions over the past year.

Whether or not a correction is imminent is anyone’s guess, but given these valuation investors who want to net big returns are probably better off shopping elsewhere.

For many, seeing a fast-growing Asian nation with favourable demographics such as Indonesia in the expensive list will be a surprise.

But again this is because its stock market has performed so well recently, having gained 17pc so far in 2014.

Those in the middle ground

Those countries in the middle ground, such as Germany and Austria, highlighted in amber, scored well on either one or two of the valuation measures. These countries are considered neither cheap nor expensive relative to their history.

Given that the FTSE 100 is trading within reach of its all-time high, British investors will be comforted by the neutral valuation rating.

On both price-to-earnings and price-to-book, UK shares are trading at expensive levels. But the Cape measure indicates that there is still plenty of value. The British stock market has a Cape score of 15.28, below its historic average of 18.79.

This suggests the strong performance that British investors have enjoyed over the past three years could continue for a little while longer.
Source: www.telegraph.co.uk

10-Jun-2014 CSE Trade Summary