The famous industrialist Bernard Baruch once quipped “If you don’t know who you are, the market is a very expensive place to find out.”
Two profound and timeless works of investing literature are helpful here: Mass Psychology by Jim Dines and The Seven Stages of Money Maturity by George Kinder both do an excellent job of exploring how Mass (market) Psychology interacts with our own emotional and psychological personalities around money. I highly recommend both of these books to anyone who is managing their own family’s portfolio, and to any investment professionals who happen to read this article.
If your deeply-held opinion is that investing is only ever about logical, left-brain mathematical phenomena such as economics, ratios and various other forms of analysis, or tweaking your process just a little bit, you may not have even read this far. You may be tempted to stop reading right now…after all, all that emotional stuff is for sissies, right?
Many people believe that buying low and selling high consistently is about how smart a person is, or how much information or technical education they have, or how much money they earn or have to invest. These factors are definitely relevant, but they’re only part of the picture. The scientific world has known for many years that decision-making happens in the right-brain, where emotions, values, feelings and intuition reside.
In my professional experience, many – if not most – of our saving and investing behaviours are deeply connected to the values, beliefs and understandings we hold around money, wealth and prosperity. The challenge for most of us is that we’ve never been asked to consider these right-brained, emotionally-based kinds of questions. For some people these may be painful questions to ponder so they avoid them, especially because a lot of this “emotional baggage” was handed to us in our childhood.
Even if we have contemplated these questions, we might not be able to articulate them. If we are aware of what they are, changing the self-limiting beliefs is another task altogether. Knowing “the problem that actually needs to be solved” is an important starting place. I’ll touch on some solutions in future articles.
As I’m writing this article, US equity markets are back near all-time nominal highs at the end of traditional seasonal strength, Japanese equity markets appear to have just started to transition to the (right-hand) downward side of a juicy parabolic pattern, and the (dead-cat?) bounce in Precious Metals seems to be hitting some resistance. So, what are you learning about yourself right here and now?
- Are you hoping Precious Metals tank again because you sold higher or got stopped out with a moderate loss?
- Are you holding all your Precious Metals positions because you are convinced that they cannot go any lower?
- Are you determined to hold onto certain investments you made because you haven’t yet made “enough” on them?
- Are you hoping that equity markets drop X or Y% because you were too scared to buy enough when prices were much lower, or perhaps because you believe that equity markets “shouldn’t” have gone up this much for this long and you’ve been waiting in cash for a long time?
- Are you secretly hoping that this economic house of cards comes crashing down sooner than later so that your worldview will be vindicated and that you can “make a killing” in the next panic?
- How do external stress factors affect the quality of the spending, saving and investment decisions that you and your family make?
- Are you more focused on “being right” than “getting it right?”
The way you answer each of these questions can help you start to understand a little more about how your personal values, beliefs and understandings around money affect your investment decisions. And each of these questions is linked to a different cognitive and emotional bias that many people have. These flawed beliefs and biases show up at the most inconvenient times – decision times – and have a dramatic effect on investment results and your emotional well-being.
We explored these and other questions during a recent edition of Talk to the Experts on AM 770 here in Calgary. Click here to listen:
Andrew Ruhland, CFP, CPCA