When it comes to investments, people usually back up their buying decision with a multitude of reasons, ranging from valuation, fundamentals, technicals, the position of the moon, and so on. Nonetheless, it would help to conduct some self-examination and understand the motivations behind your investments, and whether they are valid.
What Is Speculation?
In a nutshell, speculation on the stock market is highly similar to the thought process behind gambling. If you play blackjack or poker, (hopefully) you make your decisions based on probability and odds – which relies more on calculated risk/reward scenarios. Less educated/informed versions of speculation are similar to “gut-feeling” gambling, on which there is no logical basis.
If you find yourself consistently basing your investment decisions on a gut feel or illogical reasons, perhaps it is time to re-examine how your investments have fared after you entered them. There is a good chance that more well-thought out investment decisions tend to fare better than those based on gut feeling.
What Is Research?
Investment research is applied to many areas, but the focus is generally on investment decisions made on logical reasons. The simplest example (and one that stock research reports tend to focus on) is analysis based on company fundamentals with an emphasis on valuation measures (i.e. buying good companies at good prices).
However, if your approach is haphazard and inconsistent, there will be a tendency to jump from one methodology to another – which then makes your results inconsistent as well. In a strong bull market, this approach tends to be more forgiving. But as anyone with long-term investments in 2008 will tell you, your analysis will be put to the test.
How To Ensure You Are Making Appropriate Investment Decisions
Whether you are using technical/algorithmic/fundamental methodologies to invest in the stock market, it would be wise to base your investment decisions off methods you know have a grounding in reality. This means not basing your decisions on untested theories/valuation methods/something new you learnt off a website/forum/trading course.
With something as important as investing your money, it helps to be more astute and think through your decisions more clearly. By making sure your decision has a logical basis, your method has been proven to work in the past, and of course by not looking to make a quick buck, you separate yourself from the emotional downfall that most gamblers set themselves up for.
Top Image Credit: DollarsAndSense.sg