July 19, 2011 - Most investors get emotionally involved in their stocks.  They expect their investments to change their lives, to make them rich, to bring happiness. They infer all kinds of good things onto them. Sometimes they even love them. Until their stocks don't return the love. Until their stocks lose money. Then emotions go in another direction.

Emotions, in general, will often lead to trouble. They create an urgency to act that, in reflection, seems irrational, even disturbing. An example: Stacy, a good, rich friend, just said she's loading up on XYZ Corp. She got a hot tip that said maybe the company was going to be taken over, and even if it isn't, earnings should be great this quarter. Upon hearing this, many investors would immediately go to their computer and buy XYZ, not even knowing what XYZ does. They simply infer that if Stacy is buying it, it must be good. Sometimes it is. Many times it isn't. Substitute any name for Stacy's that is currently touting a stock on CNBC or in your favorite investment magazine.

Another example: the stock market is in the dumps. Stocks are selling at extremely low valuations, some at prices never seen before. The natural, emotional, inclination is to sell your stocks as well because, after all, everyone else is. Or certainly not to buy any. No one else is. So prices go lower for a while and you sit, basking in your own brilliance at how much money you saved by sitting on cash.

But then good, no great, news splashes across the ticker tape. Peace breaks out globally. There's a cure for cancer. The deficit is gone. Something major. The stock market takes off. Racing upward, setting new records for volume and one day advances. That feeling of satisfaction is gone. But you can't buy stocks now. Just look at where they were just a few days ago. They'll probably go back down again, once the news is fully digested.

But they don't. They keep going up. Now everyone is buying stocks. Prices are almost double from where they were only a week or two ago. So you change your mind, thinking that this rally is real, that this time the moon is within reach, and only a stopping place before the market gets to Mars. So you take all your cash and buy some stocks, any stocks, the stocks that the guy on TV is yelling about that is definitely, positively going to infinity and beyond. He must know what he's talking about. He's on TV.

You run to the computer and simply enter a Buy order. It's immediately filled. Usually at the highest price of the day since everyone else is rushing to their computers to buy as well. You sit back, and bask in your latest move. Now you're in. You can watch your newly purchased stocks fly even higher.

But they usually don't. After the initial rush of short covering and new buyers, stocks settle back, get to levels that reflect their intrinsic value rather than the immediate needs of emotionally charged buyers. These levels are usually below where you bought your stocks. Now you're not happy.

You spend hours sulking, cursing the stock, vowing that next time, next time, you won't rush in, won't follow the crowd, won't be swept away by the vortex of a buying frenzy. You watch as your stock sits and sits, then starts to go lower. Then lower. There's bad news. The whole market drops. Your stocks lead the way down.

What to do? Stocks are really cheap now. But everyone is selling. You hold out as long as you can until finally, finally, when the pain is too much to bear, you sell your stocks. Now you have a small fraction of what your portfolio was worth when your stocks were rallying ever higher. You sit, despondent, vowing never to buy another stock.

Then earnings come out. Unemployment goes down. Consumer confidence shoots up. Suddenly, in one day, the market turns around, starts to move higher, fast. You're not in.....Do I really need to go on?

This is a vicious cycle all investors go through. Emotions drive our buying and selling decisions until one day, hopefully it's today, we decide that emotions aren't helping our cause, that they're driving us to decisions that are only harmful to our wallets. We finally decide to take an unemotional, rational approach to the market. We decide to buy stocks based on valuations that appear to be cheap. We decide to hold onto our best stocks, the ones that keep growing earnings. We decide that no matter what everyone else is doing, we have a game plan, and we're sticking to it. We're leaving emotions for other parts of our lives. It doesn't belong in our portfolios.

- Ted Allrich