A very wise investor once told me that everyone who invests their money in the market has two demons that they must battle with on a regular basis: fear and greed. I don’t know what it is about human nature when it comes to money, but I am constantly surprised with myself and my emotions when it comes to investing.
What makes my reactions even more surprising is that I am a student of finance. I know a lot about the subject, and I have quite a bit of experience. I am not sure if this experience and knowledge has made me arrogant to the two demons, but I will say that a third demon has also played a role with me: my ego. I get a rush from being right about things, I feel I am king of the world: the world has validated my knowledge and my judgement. Of course, when I am wrong, I am crushed and my bruised ego drives me to behave in unreasonable ways.
I am writing this post both as advice and as a way to flesh out my own thoughts on the subject. The three demons of investing are ever present with every investor, big or small. The most common one of these demons, greed, is probably the most dangerous. Greed is actually driven by the second demon, fear, in the sense that one fears missing out on the hype and the rally in the markets. Greed is the driver of bubbles, and is the first demon to whisper in the ear of the novice investor.
The second demon, fear, usually emerges after you have been bitten by the first. After the market crashes and you get burned, you are scared to re-enter the investing world because you fear losses. Fear is a subtle demon, you are validated every time the market goes down and you are not part of it, and you start to fuel your convictions by telling others “I told you so”. And the gains in the market, which eventually will happen over time, need to be measured in terms of opportunity cost, which is a vague and distant concept that is not directly felt. I went through years of fear and lost out, and my biggest concern now is how I can overcome this fear without over correcting and turning greedy once again.
The last demon, one that I found to be ever present in my own experiences, is ego. The love of being right and the disdain towards being wrong, especially for someone as “knowledgable” as I am, are extremely powerful forces. I want others to think that I am a guru, and a large part of my identity was derived from being the “investor” in my social circle. I know that every investor gets it wrong a lot, and the most important thing is to have a process that is repeated over time that can hopefully get it right more than wrong. But when it comes to my ego, I found that I couldn’t handle the losses in front of my friends and family and this was driving a lot of behavior that was irrational.
I think I might expand on this subject in a future post, but for now I just wanted to write the basis of my thoughts on the subject. So what do I or should I do about this? My thoughts are the following:
(1) Devise a process. When you decide you want to invest your money, you need not decide on which companies to invest in. You need to first decide what your process is going to be. I have come to realize that investing in income generating investments is the best fit for my personality type. The extraction of regular income gives me the sanity to think rationally beyond my emotions. There is no right way to invest, but the only wrong way to invest is to do so without a process. Once you have a logical process, follow it religiously for a long period of time.
(2) Choose the part of the ocean you want to fish in and stick to it. There are always pockets to invest in. People are attracted to shiny things, and when the latest rally comes in a certain pocket of the market, it is usually not a good idea to jump in. One should be positioned in that pocket long before the rally comes, and the rally will come to your pocket eventually. Stick with what you know, because that’s how you get better and improve the process over time.
(3) Ignore the daily headlines. This is a distraction to the novice investor. Read deeply and avoid the day-to-day noise. Your most precious resource is your attention, so spend it on something that can further your understanding and improve your process. The news headlines are all click bait, designed to get your attention now when it is much better spent elsewhere.
