Maybe You Should Let Emotions Get In The Way of Investing
emotions, investing (general), psychology September 6th, 2008
This is something I’ve been thinking about off and on for a while now. We’ve all heard that investing should be a purely rational enterprise, unclouded by the bouts of fear and greed that apparently rule the markets on a daily basis. The argument is that it’s this fear and greed that causes so many people to “buy high” when they think they’ve identified a winner and “sell low” because everyone else is selling, too, and so you become insecure and think that maybe there’s a good reason the stock is plummeting.
Well, if that’s all you’re going on and you don’t have much further background knowledge about the stock you’re trading, then the antidote certainly is more information and more education about that stock. But such a trade - selling low, for example, or “holding onto your losers” - was never a non-rational move anyway. You just rationalized based on faulty or insufficient information. This doesn’t make your trade irrational.
But by the same token, I would argue that no investment deal can ever be a non-emotional affair. Your emotions will always be there, it’s just a question of how much attention you pay to them. (OK, you may say, then you should not be paying attention to your emotions when making investment decisions!). Probably what many people mean when they say that your emotions shouldn’t get in the way of your investing is that somehow investing should be a dispassionate affair: you stay cool, calm, and collected throughout it. There may be some merit to staying calm and making only careful, considered purchases, but this doesn’t equate with being dispassionate or disinterested. On the contrary, you have a great interest in your investments. They are your ticket to eventual financial freedom. They represent your hopes for the future. They are your safety in retirement. We can’t be disinterested or dispassionate about these things!
If you like, try relating this to some other activity that requires personal investment over time, such as reading a book, learning to play a new sport or other skill, or blogging. Do you think you can be successful at any of these if you’re not passionate or interested in it? Do you think the person who is most successful at any of these can fail to also be one of the most passionate about that activity? For example, many people online now who are running several blogs for several reasons find that they can only maintain the ones they’re most passionate about. Passion of some sort (not just an empty, externally-imposed sort of discipline) is what’s going to get you out of bed early in the morning and off to the gym on a daily basis.
Can’t we be passionate about our investments too?
If you’re passionate about a particular stock, or a group of stocks, you’re more likely to do the required research on them.
You might be passionate about doing stock research in and of itself. This is not a process of disinterested, cold rationality! You bet your emotions are involved. They can never really be separated from thought. It’s an old myth, like the myth of “left-brain,” “right-brain” thinkers. A nice caricature, but doesn’t ultimately hold water.
If you’re passionate (and if you don’t like the word passionate, try using the words “care deeply” or “are very concerned about” or “very interested in”) about Apple or RIM shares, this gives you good reason to keep up to date on the company and its progress. It’s not a lack of rationality or a preponderance of emotion that contributes to bad investing. These two always go hand-in-hand. It’s a question, I think, of how interestedpassionate you are about your investments. or The higher you score on that scale of being very involved in them, the better you will do (all other things being equal, of course). Does this make sense?
