Do investors always behave rationally? To answer the question, let's ask ourselves the following questions:
1. Do you have an investment plan?
Before we trade we all know that we should keep an investment plan to guide us through the process of trading. We are suppose to write down our investment objectives, investment horizon, and the entry and exit criteria for stocks. But most of us skip this important step and plunge ourselves into the trading world.
2. Do you do your own research?
Again, we read plenty of investment books that tell us we should always do the necessary number crunching to judge whether a particular stock is worth buying. But in reality, when we are in the midst of trading, somehow we became inertia and acted boldly, thinking that we know more than others. Or sometimes we acted impatiently, thinking that if we spend the time to do the research, the price could have shot up and we would have missed the boat! Hence, we ended up not doing the necessary research simply because we didn't want to miss the boat!
3. Can you stay calm?
Can you stay as calm as "See no evil, hear no evil, speak no evil"? Sounds exagerated? Not at all. In fact, this is exactly a true rational investor should behave! Everyday we are bombarded with plenty of information. Imagine if everyone is telling you the oil price will go higher and remain high, would you really believe so? Or suddenly, everyone is talking about how bad the economy is and the current financial crisis is going to turn into another "Great Depression", will you sell your stocks now? If we do not have cool heads, we are bound to be swayed by emotions and ended up buying at the peak and selling at the bottom.
So, if you said "yes" to the above three questions, congratulations, you're on your way to successfull trading.