Most investors have heard it before; thou shalt always remain in control of one's emotions when investing. But how easy really is it to keep your emotions in tact when it all goes south? Would having superior knowledge help?
Let's look at a couple of recent examples; Sirtex Medical Limited (ASX: SRX) soared from $11.50 at the start of 2014 to a peak of $39.95 reached on 13 March 2015. The next trading day the company released the preliminary results of a study into the efficacy of the group's drugs on people with terminal cancers. It wasn't a good result and the share price plunged to a low of $14.80, crushing the hopes and dreams of a huge number of investors and fund managers.
Now, here's where emotion and knowledge comes in. The emotional investor without a detailed understanding of the workings of the company would have scrambled to sell their shares or simply crawled into the corner and cried over the paper loss. This is clearly the wrong approach to take to investing!
What would the unemotional shareholder do; the shareholder that has done the research and knows the company well?
Hindsight well tell you that the share price has since recovered to trade at just below $30, but those investors that understood that there was a risk that the trial could fail would have either held their shares confidently, or bought more at the bargain price of $15. Indeed some of the bigger investment firms bought up big on that fateful day and have since nearly doubled their money.
Another terrific example of this was the GFC
The S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) plunged from 6750 points all the way down to 3150 points. Many investors lost everything in that 18 month period but the ones that were cognisant of the risks with the share market at its highest ever point following three incredibly strong years were able to contain their emotions during the fall and suffer only paper losses.
Take for example Flight Centre Travel Group Ltd (ASX: FLT), which is now 11 times the value it reached in the aftermath of the GFC, or SEEK Limited (ASX: SEK), which is 8 times higher. Even Commonwealth Bank of Australia (ASX: CBA) is 3.5 times more expensive now! The lesson to be learnt here, and one that's taught in countless courses around the world, is to know your investments well enough that you can see through the market hype and buy great companies at great prices!
A more recent example was the 30% plunge of ResMed Inc. (CHESS) (ASX: RMD) shares. ResMed's clinical trial also failed and resulted in a share price fall from $8.25 to $6.73, with a much larger intra-day fall recorded. Smart investors knew that the clinical trial was for a part of the business that accounted for just 7% of group revenues. Further, the specific issues found in the clinical trials relate to only 25% of the product in question. The share price has since recovered to $7.59 and some smart investors have made thousands!
