Investing should be a rational process. Very few would dispute that. But more often than not, emotions prevail in investing. Our investing decisions get clouded, at times even drowned  by our emotions. We simply get swept away by our feelings instead of guided and enlightened by our intellect and rational judgments.

Having said that, I do not mean that emotions have no role in investing. It is in fact useful for everyone to experience the swings of emotions - the fear and greed, the pride, the confidence, the excitement - the whole investing experience. This experience is very useful indeed - for how else can one truly understand the market sentiment? How else could one fathom the excitement and the bouyant optimism of the market participants when the bulls prevail, or the gripping fear that freeze the minds of market participants when the confidence suddenly evaporates?

This is just a little story about my personal experience in stocks investing. It is an account of how a financial literate lost significant sum in the stock market, quit investing for many years and finally returned in an attempt at recovering what he had lost.

My serious encounter with the market began in 2002. Having had some of my EPF funds invested in a few unit trusts with positive results, I thought … why couldn’t I do it myself? After all, you paid a few percent of your fund value to the unit trust managers, and despite that they still end up with respectable net gains for the funds.

So I withdrew a portion of my EPF and parked at an approved fund manager, in an arrangement that aloowed me to manage the funds on line. There was still a fee payable to the fund manager but not as much as that under a discretionary account. There were some limitations under the arrangement, where EPF disallowed certain stocks and certain instruments such as warrants, for understandable reason.

I started off quite well. I bought some well established stocks which were at time were obviously underpriced - the likes of CIMB and YTL, when they were not overpriced, you couldnt really go wrong. And naturally I made respectable gains. I was not long before over-confidence and recklessness set in. With my fund flushed with cash and profits from those stocks I disposed, I turned my attention to the third liners, expecting more interesting adventure and a bigger victory of course.

Some of these stocks were already listed for some time. Some were only newly floated. They apparently had quite convincing plans and sound business models. But they had no history of profits. And I knew little about the people that ran them. What I was betting on were the promise and the hope they were parading. Without a history of consistent profits or a a solid contract or concession, It isnt easy to determine values for such companies. It is here that my financial literacy broke down.

The best indicator of the "attractiveness" of the stocks were the prevailing prices then relative to what they were before. Seeing than some were much lower priced than before, I impatiently collected them in significant quantities. The 'urge' to buy was so intense that I could not even wait a little while to seek some information about the companies' respective positions and the reasons for the adverse price movements. 

The prices of most of the stocks continued declining -10% and later 20% and later 30% lower. But I kept telling myself that they would recover. The thought of cutting loss was there. But I kept thinking how could I suffer - or even acknowledge - losses when I had done so well before that? Denial prevailed and I kept holding those losing stocks. As the loss was quite depressing, I took a break and avoided looking at the stocks, and the market too. By the time I looked at them again, they had lost almost all 80% of their combined value.

When I was overwhelmed by my emotions and let them take control, I lost the rational bearing. I just abandoned rational course of actions I should have pursued. I should have looked for the underlying reasons why the stocks' prices declined. It shoudl have been a simple process. Get the information which was quite readiy available. If the prices fell merely because of bad sentiments or due to misunderstood factors, I shoudl have kept the stocks. I should have bought even some more. But if the prices crashed because of bad gearing, failing business, frauds or major legal actions - then I shoudl have cut losses.

All these sound easier with hindsight, of course! But when I was in the middle of the depressing situation, nothing looked like a more comforting just than holding on to what I had bought.