Master investing by mastering your emotions

With global security markets down, now is the perfect time to master this logic

a woman

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Although education, knowledge and an understanding of business are all important factors when it comes to investing, it is also the ability to put your emotions aside and judge a situation rationally that will determine how successful your investments are.

An article in The Australian Financial Review yesterday focused on the views of Investors Mutual senior portfolio manager Hugh Giddy, who oversees roughly one third of the $4.5 billion under the firm's management. Giddy believes that "It's the ability to step back, to make your own judgments. That's the absolute key and it's very hard to do."

Right now seems like the perfect time to apply this logic. Global security markets have experienced enormous volatility in recent weeks as the US government impasse continues, with many fearing that the world's largest economy will default on its debts.

In the space of eight trading days, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) fell from a five-year high of 5314.3 points to 5118.9 points – a 3.7% drop. Likewise, the Dow Jones plunged around 6% within three weeks as investors succumbed to fear and sold their shares.

Whilst there is certainly a very real risk that the US will enter into a default should the government not reach a resolution, many investors are listening to the media and not to their own emotions. Giddy believes that it's very hard to not allow other people to influence our decisions (whether consciously or subconsciously) and that it's often easier to run with the herd.

However, if you run with the herd, you will end up with the same lackluster returns. To achieve the greatest results, it is wise to look for quality companies that are trading at cheap valuations and stick to your judgment that they will perform strongly in the long-term, as opposed to selling in a state of panic.

For instance, whilst most of the market has remained focused on the high-yielding stocks, such as the big four banks or major supermarkets, there are many other stocks that are likely to deliver excellent returns in the long run – regardless of the outcome of the situation in the US.

Foolish takeaway

Whilst Giddy sees Tatts Group (ASX: TTS), CSL (ASX: CSL) and Ramsay Health Care (ASX: RHC) as current good investment opportunities, you could also look at companies such as NIB Holdings (ASX: NHF) or Westfield Group (ASX: WDC), which could also deliver outstanding long-term returns.

Alternatively, you could discover The Motley Fool's favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of "The Motley Fool's Top Dividend Stock for 2013-2014."

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Motley Fool contributor Ryan Newman owns shares in NIB Holdings.

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