Your Monkey Mind Is A Halfwitted Investor, Ignore It

By Richard Reis

Hello dear,

I’ve often said your psychology (or, your brain) is your portfolio’s worst enemy.

That’s true.

Today, I want to explain why this is important and how you can protect yourself.


Don’t Ignore ALL Your Thoughts

Before anything, we need to name this invisible enemy. After all, I can’t tell you to ignore your brain all the time.

No, what I am telling you to ignore is your emotional decision-making.

Thankfully, more than 2,500 years ago, the Buddha gave us a perfect metaphor for this enemy. He called it “The Monkey Mind.”

For the science-inclined among you, I’m focusing somewhat on the Limbic system.

Tim Urban from Wait But Why wrote my favorite definition of this:

“The limbic system is a survival system. A decent rule of thumb is that whenever you’re doing something that your dog might also do — eating, drinking, having sex, fighting, hiding or running away from something scary — your limbic system is probably behind the wheel.[…]
Anytime there’s an internal battle going on in your head, it’s likely that the limbic system’s role is urging you to do the thing you’ll later regret doing.” — Tim Urban

In this letter, I won’t talk about all the ways in which ignoring your Monkey Mind is the right thing to do (though there are several).

Instead, remember I’m only referring to investing:

  • Monkey Mind is that a**hole who sees “STOCK MARKET AT AN ALL-TIME HIGH!” on CNN and tells you to buy more stocks.
  • Monkey Mind is also that a**hole who sees “STOCK MARKET AT AN ALL-TIME LOW!” on CNN and tells you to sell all your stocks.
  • Monkey Mind is emotional. Monkey Mind is gullible. Monkey Mind shoots first and aims later.
  • Monkey Mind doesn’t think. It reacts.

Don’t listen to Monkey Mind.

“Following your plan imposes discipline over your emotions. Since discipline means not doing what your emotions would have you do, then if you don’t have the discipline to follow the plan, your emotions have taken control and you wind up in the crowd.” — Jim Paul

What I Learned Losing A Million Dollars

I recently re-read a book recommended by Nassim Nicholas Taleb (whom I’ve talked about here, and here).

He called it “One of the rare noncharlatanic books in finance.”

Good enough for me.

The book is “What I Learned Losing a Million Dollars” by Jim Paul and Brendan Moynihan.

I can’t say I recommend this book to everyone. It’s more focused on the type of investing I dislike (which I call betting).

However, it’s a great book to learn what not to do in every type of investment.

Jim Paul made many mistakes as an investor. Luckily, you can learn from him and avoid those same mistakes!

“When I was a kid, my father told me there are two kinds of people in the world: smart people and wise people. Smart people learn from their mistakes and wise people learn from somebody else’s mistakes. Anyone reading this book has a wonderful opportunity to become wise because I am now very, very smart.” — Jim Paul

Why Study What Not To Do?

Because there are many, many, many ways to invest.

What one pro does, another avoids.

I talked about all this last week.

However, the most successful investors do have a few habits we can imitate.

Those habits are what not to do.

“Obviously, there is no secret way to make money because the pros have done it using very different and often contradictory approaches. Learning how not to lose money is more important than learning how to make money.” — Jim Paul

What Not To Do

Remember, Monkey Mind is your portfolio’s worst enemy.

Sidenote: In fact, a lot of financial advisors argue that people need an advisor even if it’s just to guide them. What does this mean? That they think you can’t be trusted. That once things go South, you’ll panic, throw all your strategy out the window, and make the wrong choice. This might be true (and if you think you’ll crack under pressure, get an advisor). But, if you think you can hang in there when times get REALLY tough (like I do), keep reading.

Here are three things you should never do when investing.

1. Don’t Internalize

If you lose money in the market (which will happen), the last thing you can do is doubt yourself and think you were wrong.

Take an objective view. Why did it decrease? Could you have avoided it? Was it part of your plan?

For example, I’m sure a stock market crash will happen within the next 2 years.

When it happens, stocks will go down (probably by a lot).

I’m mentally prepared for this. I know it’s coming. I know I’ll see several crashes in my lifetime (they happen once a decade more or less).

I’ll need a cold head the day I see my portfolio’s value cut in half. I’ll have to remember to hang in there, and that these things always pass.

Meanwhile, my Monkey Mind will yell “WTF ARE WE DOING??! SELL THOSE STOCKS!! GET OUT!!”

That is how I’d turn an external loss (it’s just a crash, they’re common) into an internal loss (was I wrong?? Do I suck??).

This internalization will probably lead to a big mistake (which in this case would be selling my stocks for a low price).

How do I resist? By following this rule: After buying stocks, (Index Fund that is) hold onto them for at least 30 years.

When you can’t trust your emotions, let your discipline and principles guide you decisions.

Once you have a clear strategy (and follow it!), you’re less likely to internalize an external loss. Additionally, you’ll keep Monkey Mind at bay. Win-win.

2. Don’t Confuse Different Types Of Risk

You have to know whether you’re investing, speculating, or gambling.

Jim Paul summarized it well:

“The big difference is: gambling creates risk while investing/ speculating assumes and manages risk that already exists.” — Jim Paul

This goes back to my previous example. If the stock market goes down, it’s ok because I expected it (like I said, these happen every decade or so).

On the other hand, imagine I bought some Apple stock tomorrow. I have NO idea what will happen. Chances are, neither do you (unless you’re Tim Cook. And if you are Tim Cook… Hey sir! Big fan).

All investments do not have similar risk profiles. You need to know exactly what you’re doing.

The way I see it:

  • Buying an Index Fund and holding it for at least 30 years = Investing.
  • Buying Apple Stock and waiting for a subjective high price so I can sell it = Gambling.

Both are fine in their own way (as long as you’re not deluding yourself).

Like my friend Daniel said (in one of my favorite quotes): “This is parallel to going to a Vegas casino. The only difference is when you’re in Vegas, you don’t say ‘I’m investing.’”

3. Avoid Emotionalism (and the Crowd)

This involves doing something unplanned for emotional reasons.

For example, say your plan is to invest 90% of your money in Index Funds. One day however, you see Snapchat’s IPO is coming soon. Hmm… Many analysts are critical, but many are also giving very juicy predictions.

“Ah what the heck,” you say. “I’ll put 5% in Snapchat, I think this stock will go to the moon!”

Whether or not you were right doesn’t matter. This is a crystal clear instance were your emotions got the better of you (through crowd behavior).

In other words, you didn’t decide. That scoundrel Monkey Mind did.

If you have a well thought-out plan, stick to it (this won’t be easy, but it sure beats falling for Monkey Mind).

“If you have ever had a position on and intended to do one thing but actually did something else, then you were a member of the psychological crowd and made a crowd trade — whether you knew it or not. Otherwise, you would have done what you originally intended.” — Jim Paul

And that’s it for today!

Today, we learned:

  • The simian in your brain can’t be trusted.
  • Why study what NOT to do.
  • Your biggest investing mistakes will be psychological.
  • What you should not do as an investor.

See you next week (follow the series here to be notified).

Be well.


Thanks for reading! 😊 If you enjoyed it, test how many times can you hit 👏 in 5 seconds. It’s great cardio for your fingers AND will help other people see the story.

Since I write about finance, legal jargon is obligatory (because the guys in suits made me). Before following any of my advice, read this disclaimer.