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Emotional Swings of Investing

As mentioned before, one of the hardest parts about investing is that sometimes, you’re going to do the work… determine the upside, analyse your risk, figure out the optimum investment size, and still lose. Repeatedly.

And it will suck. Statistically speaking, if you flop a coin 10,000 times in a row, you’re going to come up tails 8 times in a row at some point. And if you make enough plays, investments, whatever, eventually you’re going to go on a losing streak. And we are traditionally risk adverse creatures.

How to combat this? As much as we’re not going to like the answer, it’s the same as everything else. Practice. Our default monkey instincts were just not set up for math, or for finance in general. In fact, most of our “gut instincts” are, when it comes to finance, pretty much wrong. You can see it all the time in the stock market. In 2008, the Dow went to almost half of it’s early 2008 value.

Why wouldn’t it stop at, say, 25% down? That’s a good deal, right? The market is throwing a sale. “Buy low, sell high” right?

Wrong. Our monkey instincts are not built upon wisdom, they’re built on survival and procreation. Which essentially equates to fear and greed. When you open your portfolio statement and realize you lost 25% of your life savings in the last quarter, you’re not too likely to start asking the bank for a loan to invest even more. That’s the fear setting in… “Get out now before I lose the rest!”  So it ends up being “buy high, sell low”.

As you may (or probably don’t) know, I am an aspiring poker pro. Not only do I make money from it, it has also helped me grow as a person in innumerable ways. One of those ways is that it taught me how to lose. Repeatedly. Even when it’s at a much lower level, (I play games with $50 buy-ins), you get used to the feeling of losing streaks. Over time, it takes a lot more losses to start getting under your skin. (Notice how I’m not saying it doesn’t get under my skin at all anymore…) With time and practice, you can desensitize yourself to the negative emotions we experience when me take a hit.

I’m not saying that you need to start playing poker to train your mind, but odds are you do need something to instill that kind of mental toughness into you, because it’s not a standard feature of the human brain. Maybe it’s martial arts and a statistics class. Maybe it’s buddism. (REAL Study… not just telling your friends like most “buddhists”.) But you need to develop that mental toughness somehow…. you’ll be eaten alive without it.

And not only will it help you in your financial life, those skills will spill over into your personal life, too.  You’ll find you’ll become much better at keeping your cool in trivial situations that would have made you crazy earlier.  If you have the mental fortitude to forge on despite a 15% downswing in your portfolio (which IS going to happen at some point), you’re not very likely to go into a rage when someone cuts you off in traffic.  And when you smooth the edges off any  temper you may have and increase your ability to keep calm under fire, your relationships will automatically start to improve.

One Comment

  1. Franklin Relic says:

    Very interesting points you have observed, thank you for putting up.

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