Your Financial Enemy Number One: Emotions (part I)

In Romania, between 2002 and 2007, the median price for an communist-era apartment rose by a factor of 10 (that’s plus 1000% !!) from 10’000 EUR to 100’000 EUR. For some modern apartments in central Bucharest, prices rose above levels of cities like Berlin or Paris.

In 2007, I just arrived as a foreigner in this country. Thanks to the great hospitality of romanians, I quickly made acquaintance to a lot of local people – and introduced as ‘financial specialist’, everybody was talking to me about a recent purchase or about an immediate plan to invest in local real estate.

Since I wasn’t aware about the mechanics of the property market in Bucharest, I didn’t interfere with the people’s determination to join the housing market party. But based on experience from my own country, I just wondered ‘why do you buy, when prices are high, they will come back for sure again, then you’ll get your home a lot cheaper.’

My argument was pretty much ignored or turned upside down. ‘Prices will go up further, if you don’t buy now, you’ll have to pay more tomorrow.’

It makes no difference whether you follow the real estate or the capital markets, whether you observe these markets in Shanghai, New York or Bucharest.

The history clearly shows, stock-investors or real-estate buyers always do the “opposite” of what they should when it comes to investing their money.

The main culprit for these often fateful decisions: Your brain.

The chemicals in your brain affects your emotions and thereby all your decisions. This may have a very positive effect on your love life, but when it comes to investments, these emotions unfortunately often lead you to wrong decisions.

If you ‘buy high’ the emotion of ‘greed’ overtakes logic, if you ‘sell low’ it’s the emotion of ‘fear’ that forces you into a wrong decision.

It’s pretty tough to overcome this emotions, but when it comes to financial decisions, anyone should follow Warren Buffetts timeless advise:

• “Be fearful when others are greedy and greedy when others are fearful”.

“Greed” and “Fear” are by far nor the only emotional roadblocks on the way to reach your long term financial or investment goals. Find more investment traps, laid by your brain and emotion, in part II.