How can we be more intelligent investors?
Rodin, The Thinker. Source: Metropolitan Museum of Art
Investing is a mental exercise. Form a financial plan, then implement it, then review it. These are all conceptual activities—physical prowess is not required. But investing isn’t like studying philosophy or engineering. It engages our emotions. And our emotions habitually make us act less intelligently.
One common way they do this is through something called “loss aversion.” We’re more troubled by losses than we’re encouraged by gains. Studies show that the emotional pain of taking a loss is about twice that of realizing a profit. So we let this color our portfolios, selling winners and letting the losers run as we wait for them to come back. Repeat this often enough and we end up with a portfolio of frogs and toads.
But intelligent investing isn’t about anticipating gains or losses. It’s about buying suitable securities at suitable prices. To do this we need to understand the markets. Even more importantly, we need to understand ourselves.
Douglas R. Tengdin, CFA
Chief Investment Officer
Leave a comment if you have any questions—I read them all!