I have been meaning to write this article for sometime and open up a bit of a conversation around people’s emotional intelligence and how learning more about the way we think can help with our investment decisions.
This is more my own ramblings than any well-thought out piece.
For people who do not know - Emotional Intelligence is the capacity to be aware, control & express one’s emotions. It’s learning how our emotions truly make us feel and how we can respond when we feel such a feeling, and this is very much unique to yourself.
I get that numbers, figures, ratios, chart signals, stop losses etc are all important for an investor to understand and learn about. Most topics within Stockopedia and the wider investment world is about learning about external factors. I don’t see much about learning about yourself and your own emotions that can help with your investment decisions. However the way you think and your decision making when you feel different emotions is also majorly important.
I’m 29 years old so (fingers crossed) still have a lot of time left in my investment career before thinking about retirement. I’ll be a net buyer of shares for the next year, decade, 20 years. So why do I check the stock I own daily, and get upset when they go down? Surely, If I was thinking rationally, I’d want to buy quality businesses for less, today, next year and 10 years down the line.
I own my own house but I don’t get a valuation on it every day or month. If someone knocked on my front door and offered less than I paid for it because someone else valued my property different to how I’d value it, I wouldn't accept it. Therefore, why would I use the same rational in my investments, providing the story hasn't changed?
I’ve made some terrible investment decisions to date, and I used to beat myself up about them. However, I’ve learnt that what was wrong wasn’t in making the wrong decision initially but in my response to that decision. Instead of worrying about it, now I actually look forward to making poor investment decisions. I will learn more through my wrong decisions rather than my right ones.
If I purchase…
It's been a few months since I posted my thoughts around improving my emotional intelligence to better my returns & I feel it's an exercise well worth doing. You can study the markets, charts & technical to death but I feel little is discussed or understood on the emotional side of investing. Here's a few things I've learnt to get better at:
- Confirmation bias - "the tendency to search for, interpret, favor, and recall information in a way that confirms one's preexisting beliefs or hypotheses." I felt I use to undertake a lot of research before investing in a share, but I was probably guilty of favouring information that benefited my decision as opposed to being completely impartial. Now, as opposed to reviewing shares and thinking "Why I should Invest", I know go in thinking "why I shouldn't invest" - subtle changes but can make a huge difference.
- Stop Losses Everything I've seen around stop-losses has been technical - do they work, in protecting you against further falls or does one sell on the cheap, only to see the share jump back up again. I personally believe, in my case, that by averaging down it makes the share harder to sell for me. Also, by logging into my ISA account and seeing the -40% // -50% in bold red facing me everyday, I become less confident in my own abilities. Therefore, now I use them, if only because by selling the loss, it becomes almost like 'out of sight, out of mind'. I learn from my mistakes and move on quickly, learning from the loss without agonising over it.
In taking responsibility for my own decisions, and allowing myself to make mistakes without beating myself up, I do believe I have become a better investor. I'm still learning and developing my understanding of how emotions do effect my own decisions, but I'd recommend that the next book you buy on investing in the markets, try maybe grabbing a psychological one as opposed to a technical-based one and give it a go.
