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Investing

Are you an emotional or logical investor?

September 4th, 2013 by

Do you know which is the right (or left) way?

 
 
 

Just like the market, emotional investors and logical investors each have their ups and downs. Right-brained people tend to be more creative, more emotional, and predictably unpredictable. This works for the Lady Gagas of our culture, but the stock market might not always be a right-brainer’s biggest fan. On the other end of the spectrum, left-brained people are more logical, more calculative, more like robots. They get all the praises in stock market chitter-chatter for their incredible ability to map out probabilities and trends. So which side do you lean to when making decisions?

How to tell if you’re an emotional investor

  • You let cents and dimes affect your purchasing decisions
     
  • You spend more time watching stock market news than Kim Kardashian spends watching Kim Kardashian
     
  • You have two modes in investing: panic and excitement
     
  • You focus harder on short-term outcomes than long-term outcomes
     
  • You are obsessed with calling your broker
     
  • You make impulsive decisions that would make a logical investor cringe

How to tell if you’re a logical investor

  • You can graph out patterns and trends in your head with ease
     
  • You place more importance on long periods of market behavior rather than short ones
     
  • You have one mode in investing: calculating
     
  • You value the importance of stepping away from your stocks to let them do their thing
     
  • You hear voices in your head - but they’re just numbers talking to you
     
  • You cringe at the idea of rushing into a hot deal

Two sides to every stock

You’re left-brained if you respond with logic. You’re right-brained if you respond with emotion. You might already understand how these two sides affect your personal and professional relationships, but you may still be confused about how it affects your investments.

Emotional investors are stereotypically too impulsive, too unpredictable. One notable emotional investor was Jesse Livermore, who was known as “The Great Bear of Wall Street” throughout the early 20th century (he started trading in 1891 at the age of 14).

He was married 3 times, had two children, was worth $3 million following the 1907 market crash and $100 million following the 1929 crash, but left behind only $5 million following his 1940 suicide. He advised against making emotional-based investments in his book How to Trade Stocks, yet was said to invest based on gut-feeling himself. He once wrote: “The game of speculation [...] is not a game for the stupid, the mentally lazy, the person of inferior emotional balance, or the get-rich-quick adventurer. They will die poor.”

Which way is the right (or left) way?

Not all right-brained investors follow the same disheartening path. Charlie Munger, arguably one of the best traders in the game, is a heck of a market player. His moves often baffle the other guys on the board.

“People calculate too much and think too little,” he once said, possibly referring to the oft tale of investors backing out of a stock at the first sign of trouble. Paradoxically, he is rationally emotional. Since the financial crisis of 2009, he’s turned more than 150 percent in ROI on stocks and bonds (some of which had been left in the dust by other investors), according to the Daily Journal. These investments are worth a cool $128.4 million today.

Together, he and Warren Buffett (often considered his logical counterpart) dominate markets. Did we mention that Charlie is on the brink of turning 90? He is, quite literally, living proof that not all emotional investors are doomed to follow in Jesse’s footsteps.

As for us more common folk? Aim for the logical choice. We can’t all be Charlie Munger.

 
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May 22 2017 6:25pm
 
 
 
 

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