Today’s post is to share thoughts and philosophy relevant to emotion and investing that may be of interest and are a big part of what we do.
The behavioral aspects of investing, and particularly analysis of how investment decisions can be and often are driven by emotions, are topics we regularly research and could spend all day discussing. Although a generalization, history has proven that investment decisions made under stress (emotion!), can often have a negative long term impact on overall results.
Whether you are a long term investor, swing trader, day trader or anything in between, we believe the following two points to be investment truths:
1. Investment success is a product of investor behavior more so than anything else.
2. Market activity, in the general markets, in specific market sectors, and even in individual companies, is driven by the laws of probability NOT scientific truth.
There is not one fundamental data point (out of the thousands available) that if identified as more relevant than others, guarantees a result. Nor is there a certain overlooked sentence in a market forecast or in a company’s earnings report that gives us a guaranteed outcome. Looking for these items is not necessarily bad, but we don’t view that as the best use of analytical time. What we believe is more meaningful and can be demonstrated as more quantifiable, is to focus instead on probable outcomes. Our time is better spent developing strategies (investment behaviors) that skew the probability of success in our favor. The focus is not right or wrong, but rather being consistent in behavior that is USUALLY right. Having a repeatable process in place to assist in that focus greatly increases the chances of consistency. How to skew those probabilities in your favor is an ongoing exercise and there’s not a shortage of opinions out there. The truth is, there is more than one way to achieve investment success. Whatever your choice, a true understanding of the objective and allowable risk tolerance are critical pieces to the puzzle. There is a lot to that, but simply put, no strategy works if you can’t stick to it during good times and bad. Allowing emotion to drive the decisions is low probability behavior.