The Emotional Investor

“Don’t tell me not to be emotional!”

How often have we heard these words yelled, implied, or quietly affirmed. But our own lack of rationality is often a major obstacle to our own success. Or at least, our failure to acknowledge our lack of rationality gets in the way.

Let’s face it: we’re emotional creatures. We hope, dream, panic, and run away. We’re built that way for lots of very good reasons. Our emotions help us survive in a challenging world. But when money is concerned, the less emotional we can be, the better off we’re likely to end up.

Take the practice of mergers and acquisitions. A company with reasonably competent management and a sound business plan should be consistently profitable over time. Since such companies tend to build up cash, it’s not uncommon for successful managers to seek to extend their reach via acquisition.

But a funny thing happens when managers start to buy other companies. Their desire to do a deal often trumps their financial good sense, and they pay too much for a premier target, torpedoing any chance for the deal to be successful. Any they pay too much because it becomes an emotional test of their competence, or their virility, or their business sense, in spite of the truth that the most common M & A failure is to pay too much.

When it comes to money, if we can’t check our emotions at the door, we at least need to keep track of them. Because they’re not the investor’s friends.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

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