Introduction
‘Know thyself’. ‘Tis the spark that gave birth not only to philosophy but also to general critical observation. Approaches to getting to know oneself are not limited only to the fields of science and philosophy; such can be observed in the fields of art, religion, and mysticism as well. Thus the term “observation” is applied; because rational thinking is one of the many forms of observation but not the only valid one. It’s a crucial distinction as we tend to rely too much on thinking, rationality, and planning things.
That is why modern economic theory is strewn with infinite calculations, measurements, tables, and statistics – all of which pretend to grasp the ‘holy of holies’ of economic and financial activity. These instruments to a big degree serve as confirmation biases; they’re drugs that make us believe that our lives and the world we live in are much more predictable and thus controllable than they are.
“Rational” Investing
Investing, derived from these premises, aims to remove insecurity from finance. This approach is liable to failure in a large amount of cases. Life itself is unpredictable and chaotic and that is why new things – good or bad – happen all the time, without any conscious contribution on our side.
Investing operates in the realm of human behavior аs markets are reflections of human action on a massive scale. As we all know humans are not always rational thus calculus is far from able to provide a complete insight into the act of investing. Instead, it can be beneficial to take a psychological approach to investing as well. What is meant by this?
A Psychological Approach To Investing
To “know thyself” as an individual investor. Here are some psychological traits that comprise your investor approach – whether you realize it or not:
Temperament
Embracing your innate introvertedness or extravertedness should be the focal point of building your investing approach. If you are good with people you should apply this skill to connect with people having the same interests and invest in the sectors you’re interested in. If you are curious and industrious in examining people or things, you should put this into use. Knowing your temperament and following it is the first step to developing and investing in a game you enjoy playing. Forcing yourself to play the game of investing in contrast to your core identity will always be in the way to get the best possible results and to see meaning in it.
Interests
The road to mastery is finding out what you like and to focus on doing it. Are you a tech guy, are you concerned about ecology? Answering such questions should make it easier to make a choice in which sectors to invest. Investing is a game of resilience and consistency and focusing on sectors you will surely continue to be interested in will make you stay in the game.
Risk Tolerance
Do you like taking risks or prefer to play it safely? That’s the third most important question you should have an answer to before starting any investing. It will determine your time horizons; to play the longer game based on patience with lower returns but optimizing the compounding effects by making time work for you, or to play the quicker get-rich game with higher gains for a shorter period.
Self-observation
Not as easy as it may sound at first glance. Pascal correctly pointed out that people are terrified by gazing into their own selves, in silence, without distractions. This is a fear you should overcome to upskill your investment skills.
Psychological Pain Tolerance
Life is a mix of ups and downs and investing is not different. During those downs, you will develop perseverance to learn from your mistakes. In theory to not “sell low” is easy but in practice, it ain’t since we are not robots but biochemical systems which under stress and fear tend to capitulate even when reason says you should (and the reason is most likely correct).
Complacency Traps
The other equally important side of the coin is not to get complacent during the ups. “I am a genius, that’s how I roll babe!” Until the time you won’t roll comes. Thus humility in life and the markets are equally applicable; being intellectually honest about luck is one efficient way to build humility which is the main tool for building immunity against complacency traps.
Open-mindness
As an investor, you will inevitably make mistakes. Good investors’ bets are 50% wide off the mark – either because they hadn’t invested in the right assets or because they don’t buy and sell at the right time. Education teaches us to be maximalists who panic anytime they notice tiny mistakes in their knowledge and skills. Instead of being allergic to failure, an investor should embrace it as a gradual learning experience. In most cases, this learning experience is much more useful than paying hundreds or thousands of dollars for just courses and seminars.
Personal experience is the best teacher. Being open-minded is the best companion you may have in your investing journey so that you can adapt your approach and change your investment hypotheses when they are wrong. Instead of developing an attachment to mistakes you ought to outgrow the pain, move ahead, and completely transform yourself when and if needed. Sometimes to develop a skin in the game you have to remove your skin and grow another one.
Conviction – Building An Investment Hypothesis And Following It
Even if you are a passive investor you act based on investment hypotheses; if you choose to invest passively in the S&P you, consciously or not, follow the investment hypothesis that the US stock market will continue growing over the long-term. If you invest 90% of your portfolio in Bitcoin you expect in the coming decade or two the US dollar will lose its status as the leading reserve currency and that Bitcoin is the better alternative to both gold and the US dollar. If you don’t realize the hypotheses on which you base your you are less likely to develop a good investment plan and to follow it strictly.
Conclusion
Under the guise of sophisticated mathematical models lays the facet of investing as a psychological act. A facet that is worth at least taking into consideration.
This short article aims to make you reconsider how you approach investing, looking at your choices through a psychological lens. After reading this text, consider your current investments and see if there are any adjustments that need to be made!
Written by Ole Lukandi
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