Investing is a war between two key emotions
As a young adult, I remember coming back from a night out with my friends and sitting in-front of CNBC to watch the US market action. It had been a big night. It’s one of the most vivid memories I have of my early adulthood. A group of boys, hung over after a big night out and here I am lying on the couch watching CNBC.
I’ve been intrigued by investing my whole life. Consumed, obsessed. Ever since I was a child, the word investing or investments would trigger a chemical in my body that would stimulate my mind.
In high school, I read the financial review newspaper every day. I was so annoying in economics class because I wouldn’t let anybody else answer questions. I had to be right all the time.
In my first job working in accounting, the partner refused to give me a pay increase while doing work experience because according to him “all you do is sit on the computer all day and trade shares”. I couldn’t disagree.
For most people, the investment process is confusing. It is unpleasurable, something that they need to do, but don’t really enjoy doing it. It freaks people out. For me it’s the opposite. I could sit down and talk about investing all day long and I did that over the past decade, holding more than 2000 media interviews with major TV stations.
Why am I obsessed?
Recently started to ask why I have this obsession. It’s not the money, it’s the game. It’s the process. In the same way that an Olympic athlete wants to win, I want to win the investing game. Not for the media or the podium, but for the sense of achievement.
My obsession comes from something I experienced very early in my life — the impact successful investing can have on somebody’s life. I noticed that wealth is not built by work but through investing.
I saw friends and family who had no level of formal education making huge amounts of money through their investments. At the same time, I knew very well educated people who could barely make ends meet.
Very quickly I realised it takes the same level of energy to make good investment choices as it takes to make bad investment choices. If fact, sometimes it’s much more likely that you will lose money the more energy you put in.
Get it right and investing can change your entire life. Wealth is created not through labor but through the channeling of income you derive in labor into investments. To me this is amazing.
Investing is an emotional war
Sounds easy, but as human beings, things are more complicated. The brain is the biggest difference between the world’s most successful investors and everybody else.
They don’t teach you this in school. In University, studying business or finance is about theory — mathematics and science. You can have a PhD in business but lose billions of dollars. It happens every single day.
What I’ve learned from speaking with hundreds of successful investors, meeting dozens of CEO’s and working with some of the largest investment brands in the world is that investing is an emotional war between two variables — fear and greed.
Either fear or greed wins. Every single investment decision you make will be a war between each of these emotions. Sure, we would all like to have the upside from a good investment but we fear the downside. When we don’t act, fear has won.
Fear is our natural primal instinct. Through our biology as human beings, we have used it to stay alive. Being aware and minimising life threatening events has got us to where we are.
But what about the upside, the trigger that gives us joy and advancement? Most human beings aren’t good at building this or realising that this exists. A friend of mine recently told me to change the word greed to achievement. Long story, but I tend to agree with him.
So what are some human beings able to focus on achievement, while others are consumed by fear?
Use this simple quadrant
It’s early days. I’m not a behavioural psychologist (yet) but I sat down and mapped what I think is the framework for a successful investment. Successful investors — whether they understand this or not — tend to progress through the quadrant, sometimes with less energy than peers who make bad investment choices.
Get this process right, try it a few times and I believe the power of achievement starts to overcome fear. The balance takes place and investors can start working through the process in a more enjoyable way. They don’t just become consumed by the fear, but look forward to the upside and sense of achievement.
The process works like this. First, understand that there are four key emotional states which investors go through before they make an investment decision. These are:
Why — This is the primary motivation, the most important motivation for any decision. Human beings have an underlying desire to progress. This usually comes down to family, legacy, charity or a larger sense of purpose. Without a why, there is no immediate urgency to do anything.
Most investors have a vivid understanding of their why but it doesn’t become a driving force in their decision making process until they sit down and think about it properly. Always start here first.
How — This is where most people start and stop. It is where they get confused, frustrated. The investment industry is selling you products and services in this section — how to trade shares, how to invest in property, how to sit on the beach and do nothing. We’ve all seen the ads.
How is important, but not complete without the Why. Always proceed with How in a way that makes you comfortable, that you understand and that fits in with your Why. It’s ok to have a lot of options in this step, you will drill down and prioritise in the next steps. The important part is to just discover and move on. Don’t stay here or fear will eventually takeover.
Where — An extension of the how, more specific. This is when you start making decisions. For example — are you going to invest in stocks in Australia, USA, London or Asia. Are you looking at purchasing property in Sydney, Brisbane or Melbourne. Do you want to open a business in a mall, a street or in an office.
Get busy here and start working out your options. Remember your Why is still the reinforcement. .
When — This comes down to one key factor, urgency. Understand that your When should not be subject to impulse buying in the same way that you are impulsed to purchase a coffee or pair of shoes. Those who get the When wrong pay the price in the future.
If you wait too long, you miss out and this causes a perpetual cycle error. You’re starting on the wrong foot. You should be thinking about When in the same way that you are thinking about How and Where.
Make better decisions
Remember that investing is not about how much you know, who you know, what you know. You can expend the same about of energy and have two different outcomes.
The mindset is the key factor, it is about channeling thought into a framework that allows for rational thinking between the two key driving emotions of fear and achievement.
Start with Why you want to invest in the first place, think about all the options in How to achieve your goal, drill down into Where those opportunities best present themselves and throughout the process understand the importance of knowing When the decision is due.