Money is a highly emotional issue for most people. When it comes to investing money, the asymmetric emotions of greed and fear can be so powerful as to overcome rationality. In other words, it's quite easy and common to find otherwise highly intelligent people engaging in irrational investment behavior that they later regret because they become distracted by their emotions. To be successful in investing, it is critical for you to develop a coping system that effectively addresses these powerful feelings.
Risk and uncertainty make people uncomfortable and engender fear when it comes to matters of money. However, it is important to realize risk cannot be completely eliminated, and investing inherently involves uncertainty. Stocks that people feel “certain” will produce investment gains are nothing more than those about which there is a consensus. Such stocks usually have high valuations that already discount a lot of good news. Any slight disappointment would produce losses. The art of investing is actually about managing (and not the impossible task of eliminating) risk and uncertainty.
It's human nature for people to be fearful when they see their net worth drop “on paper.” One's intellect might say, “I liked the company before at higher prices and it just got cheaper, so let's buy more,” but one's gut might be screaming, “I better get out now before I lose everything!” Not knowing or understanding one's investments will surely exacerbate this panicky feeling, but having such knowledge doesn't guarantee that one can overcome the alternating emotions of fear and greed. Investments must be one of the only things in life that people like to buy at higher prices.
Sir John Templeton once remarked that the most attractive investment opportunities were often created when some macro-economic or market event had caused panicky investors to unduly and severely depress the price of good companies along with the bad. He coined this investment approach the "principle of maximum pessimism.” When he was still actively investing prior to his retirement, he liked to scour for investment opportunities in areas where gloom and doom were pervasive. His contrarian bent therefore often led him to invest in the very areas that the investment herd was abandoning. Through careful security selection (rather than blindly buying into the country as a whole), he believed that it was in fact much less risky to buy into good companies once the price had come down and the damage already done. This is essentially the “buy low, sell high” approach, a principle easily understood, but much harder from an emotional point of view to practice and execute.
Warren Buffett once said successful investing is largely about controlling emotions. What he meant was that those who are able to have the appropriate emotional response to market developments are more likely to succeed (e.g. buy good investments for the long run on short-term weakness.) We could not agree with him more. Feelings of greed and fear are an integral and immutable part of human nature, but they must be kept firmly in check for a lifetime of investing to be successful.