Governing Investment Emotion

Does your personality influence how you invest? Likely.

“Optimism is the enemy of the rational investor”
– Warren Buffett

I think that is true, but it does not go far enough. Pessimism is an enemy too. Optimism will lead you to invest in projects that are not good enough while pessimism will help you miss those, but at the cost of missing the good ones too.

Rational is the ideal, but since we are human, an unlikely condition for most of us. Experience will help a person come closer. Experience improves knowledge of the system and its underlying tendencies.

It is likely easier to think about the emotional part in somewhat different terms. Suppose we equate optimism with greed and pessimism with fear. Now it is more manageable. We know how to deal with both of those.

Greed is defeated by assessing our objectives and how the investment relates to them. We can compare the investment as it sits in our portfolio against our design for the future. Is it proportional in our rational portfolio? Does its current price reflect value as we have defined it? Is it a popular stock among the unknowing part of the investing world? If yes to any, it may be time to reap some reward.

Fear is defeated by knowledge. Most people who fear the stock market do not understand it. People fear things that can hurt them when they know too little. Knowledgeable people respect the possibility of being hurt, but understand the signs and environmental cues that allow them to manage the situation.

In either case, knowledge and it application moves a person towards the rational.

Rational people can answer a question. “How did you come to choose this security?” The others will talk about feelings. Feeling and thinking are not closely related but they can help govern each other.

“Be greedy when others are fearful and be fearful when others are greedy.”

That helps you understand how you employ rational.  Again courtesy of Warren Buffett.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  866-285-7772

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