Investment Workshop 11: Emotions

Today I want to talk a bit about emotions.

A while ago, we conducted a poll of our fellow Revolutionaries to see what kind of personalities our readers were as identified through the Myers-Briggs personality test site 16personalities.com. What we found surprised us.

First of all, the top 5 personality types were:

  1. Architect
  2. Logistician
  3. Logician
  4. Executive
  5. Commander

These 5 personality types add up to a combined 32% in the general population. Yet on this blog, they made up a whopping 66%! These types are vastly over-represented on our weird little blog, and the FIRE community by extension.

These personality types (of which FIRECracker and myself are) all have their individual strengths and weaknesses, but one thing that unites these 5 types is that they tend to make decisions logically and unemotionally. This isn’t to say that we’re all unemotional robots. We still feel emotions, but if we need to make an important decision and our logic (i.e. the “Head”) disagrees with our feelings (i.e. the “Heart”), our Head tends to override our heart and that’s how our decisions get made.

But what this revealed that was surprising is that a full 34% of you have a very different personality type than us. Personality types like Mediator, Protagonist, Protector, Consul, etc. These personality types are, again, unique and special in their own individual way but one thing that unites them is that your decision making factors in more of your emotions than ours do. When the Head and the Heart disagree, sometimes the Heart gets to decide.

One of the things we have to be careful of as bloggers and writers, is not to only speak to one side of the room. People tend to surround themselves with people that think like them. When I was working as a software engineer, every day I was surrounded with people like me. Engineers who spend all their time with their noses buried in a spreadsheet. “Show me your data” was a phrase I heard constantly in meetings and conversations in the hall.

And the finance blogging community is a lot like that. Many of us are also very data-driven logic-based people. Hell, every single finance blogger I know personally is an engineer (or works in a very similar field like mathematics). And sometimes it’s easy to forget that there are many of you who don’t spend all day buried in their spreadsheets.

So let’s talk a little about emotions and why they’re important in investing.

Emotions and Investing

Now, emotions are just like everything else. They are neither intrinsically good nor intrinsically bad. But in certain contexts, emotions can help you a lot, while in others, they screw you over. Choosing to marry someone, for example, is an excellent time to rely on your emotions. Do you love that person or not? If so, get married. If you suck all the emotion out of that decision and instead rely purely on logic, it’s not going to work out well. A friend of mine got proposed to via a PowerPoint presentation. In it, the guy listed out a 12-bullet-point plan on why they should get married, including an extended pros-and-cons table. Because the pros outnumbered the cons by a 2-to-1 margin, he reasoned, then therefore getting married was the only logical choice.

She said NO, and on follow up she clarified that into F*CK NO.

Please check this box to conclude my proposal.

Investing, however, is a different story.

The Emotions of Fear and Greed

In investing, the two major emotions that come into play are Fear and Greed. Fear is what causes people to panic-sell because they believe a stock will plummet to zero, and Greed is what causes people to buy something they think will go up to infinity. Wall Street knows that people are susceptible to this, and as a result uses the media to manipulate people into doing what they want by playing on their emotions.

Here’s how it usually goes. Some Wall Street trader picks up a position holding a stock, usually a cheap, thinly traded company. They then leak “inside information” (which they just made up) to the media, or post crap in stock market forums, chatrooms, or social media. This triggers both Greed (because they think that there’s easy money to be made) and Fear (of missing out), so the victims then flood into the stock and push its price up. And then when its gone up enough, the original trader sells their positions at massively overvalued levels, the price crashes back to where it was before, and everyone else loses a ton of money while the trader runs off cackling. This is known as a “Pump-and-Dump” scam and is basically what the main character did in the movie Wolf of Wall Street.

The opposite also works. Someone can take a short position (betting that the stock will go down) and leak negative information, causing the stock to go down as people flee in a panic because of Fear. This is known as a Short-and-Distort. And it also works with houses, as real estate agents convince people that they’d better “Buy Now or Buy Never” because housing always goes up. This is known as “Toronto.”

So that’s why we’re running this Investment Workshop the way that we do. You make the important decisions (Asset Allocation, ETF selection, buy schedules) when you’re not emotionally triggered, and we stick with our original decisions no matter what’s happening day-to-day. Because day-to-day, there’s plenty to be scared of. Just open any news site on any given day and you’re bound to be bombarded with all sorts of scary shit like shootings, wars, and forest fires somewhere in the world. But if we pulled out of the markets every time something scary happened, we would have missed out on the Index’s relentless grind upwards over the years.

So having emotions is fine. But we don’t want to trade with them.

Onto the next section!

Go back to the previous section


WORKSHOP TOOLS

How much does it cost to participate in the Investment Workshop? NOTHING. Because that's how we roll. All we ask is that you sign-up using the following affiliate links to keep it free forever:

For Canadians:

1) Questrade

2) Passiv

For Americans:

1) Vanguard

2) Empower



Disclaimer: The views expressed is provided as a general source of information only and should not be considered to be personal investment advice or solicitation to buy or sell securities. Investors considering any investment should consult with their investment advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decisions. The information contained in this blog was obtained from sources believe to be reliable, however, we cannot represent that it is accurate or complete.


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