5 Ways Philosophy Can Improve Your Investing
If investing and trading is all about how you think, it makes sense to learn from the best thinkers in history
The art of trading and investing is not exempt from Pareto’s 80/20 Principle, in fact far from it. Conservatively, 80% of trading is down to the way you think, the remaining 20% is down to your technical skill and business processes. In the same way, most of your profits will come from 20% of your positions. You get the idea. There are also paradoxes to be found everywhere in trading. Everywhere. We’ll revisit that another time.
OK, so if the art of thinking clearly is an absolute necessity for investing success, how can one acquire that mindset? Well, I’ve found a healthy dose of philosophy to be a secret weapon, and not just concerning trading but in life too.
I first stumbled across philosophy at around age sixteen when I elected to study it as a GCSE and then as an A level subject and it blew my mind. The fact that I failed it, and my other A level subjects are irrelevant, but it was at this point in time where the philosophy seed was sown. Fast forward a decade and a half and my enjoyment of the subject has increased ten-fold, not least because I no longer have to study under coercion but because it actually assists hugely in my career and life. Here’s how learning from thinkers such as Socrates, Marcus Aurelius, and Seneca, to name but a few have helped me and could help you too.
1. Philosophy Teaches Stoicism
(stoh-i-sizm) — “Named after the Stoics, Greek and Roman philosophers of the 3rd century BC onwards, who taught that goodness is based on knowledge and that the truly wise man is indifferent to changes in fortune” ~ The Oxford Paperback Dictionary
In essence, being stoic means to be calm and not excitable; bearing difficulties or discomfort without complaining. If there was ever an endeavor where calmness is essential, it’s trading. One can lose it quite easily and I’m talking from experience here. I can’t recall how many times I’ve wanted to throw my laptop like a Frisbee during the earlier days. If you trade, you’re probably nodding or smiling or both.
“When your emotions are at level ten, then your decision making is at level one. When your emotions are at level one, then your decision making is at level ten” ~ Eric Thomas
Whoever gets angry first, loses and when it’s you vs Mr. Market, he’s going to come out on top every time. In trading and in life, calm is a superpower; only Bruce Banner is the exception. The ability to remain in control at times where all you want to do is allow the irrational chimp to take over due to some perceived threat is absolutely key. Most of us don’t live in the wild like our ancestors did and so it’s highly unlikely that the perceived threat is life or death. Put the chimp back in its box. If you don’t make a habit of controlling these impulses it will inevitably lead to bad practices such as over-trading, revenge trading, position over-sizing and generally breaking sound trading rules.
Author of The Daily Stoic, Ryan Holiday writes, “If there is a central message of Stoic thought, it’s this: impulses of all kinds are going to come, and your work is to control them, like bringing a dog to heel. Put more simply: think before you act.”
Practising stoicism will enable you to effectively inject logic at these moments in time and prevent you from having to live with decisions you’re likely to later regret.
2. Ego Check One Two
Everyone has an ego, some bigger than others. It’ll serve you well to cut this down to the smallest size possible when trading. It’ll probably do you good in life too. Most people think investing is about predicting the future and I used to think so too. There is some truth to this yes, but not as much as is commonly thought. While the practise of forecasting has its place, it’s all about execution. This is the major difference between market analysts, those who come up with theories about the future direction of the market, and traders, those who execute the trade, essentially putting their money where their mouth is. Make no mistake, these are two very different mindsets. That’s why investment firms have separate people fulfilling these roles. As a retail investor, you must be able to do both.
Smart people learn from everything and everyone, average people learn from their experiences, stupid people already have the answers ~ Socrates
The message here is humility. Knowing that you don’t know and being willing to admit that. Genuine humility is a virtue. To be a great investor, you have to be more than OK with being ‘wrong’, you’re ego cannot get in the way. This means cooking up a hypothesis and then being able to change your mind on a dime piece because the market has revealed new information, thus altering the picture. This isn’t easy to do because from such an early age we are programmed to believe that it’s not cool to be wrong. Wrong equals failure. Think about it, you put your hand up in class and get the answer wrong, you might have been laughed at. Get it wrong in an exam and you fail. Right equals good. Wrong equals bad.
Being ‘right’ in the market sounds as if it’s what you should be striving for, but confidence gained from being ‘right’ can quickly lead to euphoria and an overinflated ego. Arrogance and trading don’t mix well. In fact, arrogance and self-awareness seldom go hand in hand full stop. By removing your ego you’re no longer concerned with calling a move correctly, you simply make yourself available to all of the information on offer in that present moment thus giving yourself the best chance of making money. When your idea doesn’t work, no problem, you cut your losses and move on.
“ So we must meet ego with the hostility and contempt that it insidiously deploys against us — to keep it away, if only for twenty-four hours at a time”. ~ Ryan Holiday
3. Understand Arguments For and Against
The number one skill I learned in philosophy classes was to always ascertain arguments for and against a topic of debate. If you only know one side, you don’t know enough. I took this to heart and it’s stayed with me ever since. You may be thinking, “OK, that’s pretty basic.” Yes, it is, but for most folks, it’s only head knowledge because pragmatically speaking, people do not behave this way. We constantly take sides having heard only one person's version of events. If we want to prove something, we search for confirming evidence only, dismissing information that does not support our viewpoint, thereby becoming cognitively blind to anything that contradicts us (confirmation bias). That’s a problem.
“The first to speak in court sounds right, until the cross-examination begins” ~ Proverbs 18:17
How does this link to investing? Well, the only thing certain in the market is uncertainty, so for anyone attempting to apply maxims in this complex system environment is illogical in their thinking. It makes no sense to seek certainty in a place of uncertainty. The art of thinking in probabilities is the way forward, but again, this is not how we learn to think when growing up. It’s a skill that must be developed. It takes time and effort. Adopting a philosophical approach can help with building a probabilistic mindset. The great thinkers of the past tended to view things holistically, objectively, and without colouring information with their emotions, prejudgements, or biases. This is how one must strive to see the market. Then you are able to stack the confluence factors for and against an investment decision and make the call.
4. Independent Thought
I’d go a step further than independence and say that it pays to be a contrarian. Throughout history, the most renowned thinkers have always been considered to be ahead of their time, only retrospectively though, so much so that it cost some of them their lives. Nowadays, whilst you are less likely to be hung from the gallows in literal terms, it can still happen figuratively speaking. Personally, I think the alternative of running with the masses is much worse.
“Whenever you find yourself on one side of the majority, it’s time to pause and reflect” ~ Mark Twain
Critical thinking is similar to being able to see both points for and against in order to have an objective view of a matter. One difference lies in the idea that you must not be swayed by outside influences in your thinking. While this does not mean you should behave like a disagreeable jackass for the sake of it, it does mean that you must question generalisations, heuristics, and biases. Be wary as group thinks become more insidious when you are in a comfortable situation, for instance, at work or with friends because naturally your defence barriers are lowered. The inherently faster but lazier part of the brain referred to as system one in Daniel Kahneman’s, “Thinking Fast and Slow,” is in control. System two, which handles more slower, considered thought processes often isn’t exercised in these instances because it’s just too much hard work.
Recently I’ve sought to trading in mental isolation as if I were on a deserted island. As investor Jesse C. Stine highlights, “This is not easy for most people to do because human nature dictates that we seek the safety of the herd in order to simplify or eliminate the thinking process. We are controlled by the urge to be in agreement with and to be constantly connected to the viewpoint of others.”
I suspect this point of independent thought is especially difficult to practice in today’s hyper-connected world where you never have to be alone. There is always some outside stimulus ready to engage with us making our brains reactive to whatever that stimulus is. Example scenario. If you see two people at dinner and one excuses themselves momentarily, it’s almost guaranteed that the remaining person will reach for their smartphone. Why? Are those few moments alone really that unbearable? I’m not sure that’s healthy.
Anyway, back to the case in hand and how clouded consensus type thinking can impact investing. Well in the classic 1987 film, ‘Wall Street’, the great Gordon Gekko said it best, “Sheep get slaughtered.”
5. Adopting Healthy Habits
Philosophy teaches that you are the total sum of your habits, both good and bad. You already know this but it doesn’t make it any easier to break the bad ones and cultivate the good ones. You have to very intentionally work to displace the negative with positive. Habits are the compound effect personified.
If you trade without discipline and a process, you are not trading you are gambling. You must follow a process which is essentially a deconstructed set of habits that are practised day in day out. Good risk management, using stop losses, planning, and recording trades are just a few examples of good habits to adopt immediately if you aren’t already doing so. Failing to implement these things might actually get you some decent results for a period of time, but eventually, the market will cut you down to size. Jesse Livermore is a prime example of an amazingly talented trader from the early 1900s who amassed a tremendous fortune only lose everything…three times over! You and I are not Jesse Livermore, so if it happened to him, it can happen to you. You can’t have good habits when trading and investing, but then have bad habits in other aspects of life and expect the effects not to permeate over.
“You must put in place training and habits now to replace ignorance and ill discipline. Only then will you begin to behave and act differently” ~ Ryan Holiday
The upside of adopting healthy habits far outweighs the initial exertion and effort that is required to develop them because eventually, they will change you for the better, whatever mountain you are scaling.
My intention is to delve deeper still into the minds of these great thinkers of the past, and not just because I believe it will continue to improve my trading and investing. I find it incredible, how for the price of a coffee, we have access to the smartest minds who took the liberty of recording their highest thoughts over their lifetimes. Thoughts that we can now study and consider, to determine how we too can cultivate wisdom in our thinking and living. I’d encourage you to join me in some philosophising.
Thanks for reading.
