Overview – Why Would an Investor Need Emotional Intelligence?
In several articles here on Ilucidy we’ve talked about emotions and investing before, whether directly or indirectly.
After all, we’ve repeatedly looked at the dangers of succumbing to your emotions as an investor: impulse buying, panic selling, the fear of missing out – there are so many ways an investor can doom themselves if they choose to listen to their heart rather than their head.
Because the dangers of letting your emotions get the best of you are abundantly clear, the logical solution should be for investors to be devoid of all emotions, right? Not necessarily.
Attempting to “get rid” of your emotions is much easier said than done, and it usually never ends well any time an investor tries to perform this extremely difficult (and arguably, dehumanizing) task.
Intelligent investors understand this, and instead of trying to rid themselves of their emotions they instead try their best to understand how exactly their own emotions work, while at the same time accurately understanding the emotions of those around them.
Therefore, not only do intelligent investors constantly sharpen their analytical skills, but they also learn to develop their emotional intelligence as well.
Investors Operate at the Intersection of Art and Science
What makes a skilled doctor? Many people expect doctors to possess a superior understanding of medical science to properly diagnose illnesses and recommend potential treatments. Indeed, a skilled physician needs to have strong technical knowledge and skills to perform their jobs effectively.
However, If strong technical skills were all that mattered, then that would mean everyone’s sole criteria when looking for a doctor would be to determine who has the most credentials and how extensive their knowledge is; in reality, that isn’t entirely the case.
Instead, most people seek doctors who genuinely care about their well-being and are reasonably easy to interact with. In most people’s minds, the “ideal” doctor is someone who possesses strong medical knowledge but also has strong interpersonal skills needed to effectively interact and communicate with their patients.
A doctor can have all the medical knowledge in the world, but that won’t matter if their patients don’t like and/or understand them.
Investors and doctors may not share that much in common, but the one thing they do share is that they both need strong technical knowledge/skills paired with equally strong emotional intelligence if they want to succeed.
When we look at investing, many people focus on its analytical side – it’s no mystery that investing involves a lot of reading, analysis, and number crunching, so lots of emphasis is placed on how investors can sharpen those technical skills.
Yet, many people, investors and non-investors alike, tend to forget that investing has an emotional/interpersonal aspect to it as well.
Remember, investing is simply a subset within the larger world of business. One of the realities of business is that people do business with whom they know, like, and trust. A business can offer the greatest product or service compared to its competitors, but that won’t matter if nobody trusts them.
Although investors pursue investment operations after careful analysis, by choosing to go with certain investments over others they are indirectly saying “I trust you, so I will leave my money in your care”.
No rational investor would leave their money under the supervision of someone they don’t trust, no matter how appealing the potential returns may be. This is why so many investors place great emphasis on assessing an investment’s qualitative factors, such as the quality of management at a large corporation.
Deep down, every investor wants to park their money somewhere they know will take care of their interests, whether it’s a large corporation or mutual fund, even if they don’t explicitly state this.
We also know that financial markets don’t always behave logically. In times of upheaval, it’s almost impossible to get an objective understanding of what’s going on because emotions are running high.
Sometimes, the best way to understand what’s currently going on with the markets isn’t to look at market indices or other numerical measures, but rather to understand the sentiment of other investors. There are times when an investor will need to “read the room” to understand what’s going on.
So, in addition to an investor’s strong technical skills, it’s also in their best interest to understand what emotional intelligence is and how to implement it as a key investing skill.
What is Emotional Intelligence?
There are dozens of definitions for emotional intelligence, but for our purposes, we will go with the following:
Emotional intelligence is the ability to:
– Recognize, understand and manage our own emotions, and;
– Recognize, understand and influence the emotions of others
This definition reminds us that emotional intelligence doesn’t only deal with our own emotions, but with the emotions of other people as well.
Based on this definition, an investor should have superb emotional intelligence because it means they can “recognize, understand, and manage” their emotions very well.
It’s easy to think that the best way to succeed in investing is to be emotionless, but that isn’t the case at all. At the end of the day, an investor is still human, and to be human means to have emotions. Even the most hardened and stoic individuals have emotions.
Rather, a skilled investor is someone who manages their emotions very well and understands that, no matter what, they cannot allow their emotions to get the best of them. Bad investment decisions are always one emotional decision away.
Being book-smart and having strong analytical skills are crucial to any investor’s success, but they only represent half of the equation.
Superb Analytical Skills Alone Aren’t Enough
Every investor needs to be “smart” to some degree. After all, you can’t expect to get anywhere as an investor if you lack basic technical skills such as critical reading, problem-solving, and numeracy.
Investors constantly rely on their technical skills to help them make informed decisions, so it’s not surprising that investors spend so much time and effort refining their analytical skills and finding new ways to improve them.
However, investing isn’t an activity where your success is commensurate with your IQ. The now-defunct Long Term Capital Management had some of the brightest people in finance working for them, yet it still failed in just a few years, not because they weren’t smart enough but because their emotions took over their logical thinking.
Having lots of brainpower at your disposal doesn’t necessarily mean you’re guaranteed to succeed as an investor. There’s no shortage of very smart people who are part of the investing scene, yet it’s not unheard of for these individuals to suffer massive losses as well.
No matter how smart you are, failure to understand your own emotions and the emotions of those around you can lead to your demise as an investor.
Having strong analytical skills is certainly important, but investors must not forget that it’s just as important to be emotionally intelligent as well.
Using Emotional Intelligence to Your Investment Advantage
By learning to master your emotions, you make your job as an investor that much easier.
An investor who has superb emotional intelligence is a force to be reckoned with. It doesn’t matter how much emotional strain this individual is subjected to – they know how to keep their emotions on a tight leash and, as a result, can still think rationally even in the most stressful circumstances.
Not only that but having strong emotional intelligence means investors are less likely to make impulse decisions. Because these individuals have mastered their emotions, they understand when their emotions are starting to overtake their logical thinking, and can reign their emotions in before they lose control of them entirely.
The last thing an investor wants to do is to make a split-second decision in the heat of the moment because these decisions are usually formed on a strictly emotional basis. Therefore, the first step towards mastering emotional intelligence starts by learning to manage your own emotions first.
While the importance of disciplining your emotions can’t be overstated, remember that emotional intelligence also deals with the emotions of those around you.
An investor that can accurately gauge the emotions of those around them puts themselves in a very advantageous position. This is because they can gain valuable information just from understanding how others around them feel.
There’s a popular investment adage that states “be fearful when others are greedy, and be greedy when others are fearful”.
While this sounds easy in theory, it’s surprisingly difficult to apply this out in the real world. The problem is that it’s hard to ascertain for certain whether others are feeling greedy or fearful.
At the height of the COVID-induced market panic, many people started investing for the first time. In their eyes, everyone else was “panicking”, so now was the time to be “greedy”.
In reality, there were more greedy people during this time than there were panicking ones. Thousands of people all entering the investing scene for the first time all at once certainly isn’t a sign of panic.
Accurately understanding the emotions of other investors is a skill not many investors have, but if mastered can help an investor avoid accidentally following the crowd. It’s easy to call anyone “greedy” or “fearful”, but very hard to determine if this is true or not.
Emotional intelligence, just like any other skill, isn’t some sort of innate ability the “select few” have. Although some people are naturally better at understanding emotions than others, this doesn’t mean emotional intelligence can’t be developed and improved.
As an Investor, How Can You Develop Your Emotional Intelligence?
Generally speaking, developing analytical investment skills is a relatively straightforward process: it requires consistent study, practice, and lots of persistence.
Although this process sounds easy on paper the reality is far from simple. It takes a lot of time, effort, and energy to develop your analytical skills, and even more effort to maintain those skills at a high level.
You don’t develop world-class analytical skills in just a few days – this is a process that takes several months at the very least.
Unsurprisingly, the same process of consistent study and practice applies when it comes to developing emotional intelligence.
Before attempting to recognize, understand, and influence the emotions of others, we must first learn to get our own emotions under control. You can’t possibly hope to assess other investors’ emotions if your own emotions are running wild.
Exercises to develop your emotional intelligence don’t have to be overly complicated for them to be effective.
For example, when trying to develop your emotional intelligence to keep your own emotions in check, you can start by figuring out which situations you react emotionally to, what those specific emotions are, and what you end up doing as a result.
Imagine that, when you’re under a lot of time pressure, you start to become more easily irritated, and so you lash out at people who disturb you while you’re working. Very few people enjoy working under immense pressure, but one of the fastest ways to lose friends/allies/supporters is by yelling in their faces.
With this in mind, the next time you find yourself in this scenario, instead of automatically yelling at people who disturb you, you can explain to them that you need to urgently finish a task, and would prefer not to be disturbed unless something desperately needs your attention.
Over time, as you better understand what sort of emotions you’re prone to and recognize what triggers an emotional response, the better you can keep your emotions under control when they start to flare up.
On the other hand, developing your ability to understand the emotions of other investors is very tricky. There are millions of investors, and it’s very unlikely you’ll meet them all, let alone have them all in the same room. So how exactly can you assess the emotions of others behind a screen?
One way is to stay up to date as best you can with investing news, specifically opinions pieces – there are countless writers out there who share their sentiments and reasons why they feel a certain way.
Many news articles also have comment sections – taking the time to skim through these comments can also give you a good idea of how other investors are feeling.
These are just a few ways to develop your emotional intelligence. Everyone handles their emotions differently, so it should follow that everyone learns about emotions differently as well.
Regardless of how you develop your emotional intelligence, what matters is that you put in the effort to develop it along with your technical skills.
Wrapping Up
Investors use their analytical skills all the time to help them make wise decisions. There’s no shortage of information for investors to pore over before deciding, so it’s only natural that investors put in the time and effort needed to constantly hone their analytical abilities.
However, strong analytical abilities and vast investment knowledge only represent half of the equation. None of these things matter if an investor drops their ability to think rationally under the slightest emotional stress.
At the end of the day, every investor is still human, and to be human means to have emotions. There are times when emotions overtake logical thinking, and as a result, chaos ensues in financial markets.
So, in addition to an investor’s superb array of analytical abilities, they must also have an equally impressive degree of emotional intelligence.
Investors who have mastered emotional intelligence not only keep their emotions on a tight leash but are able to assess the emotions of other investors. Strong analytical skills, partnered with equally strong emotional intelligence, is a very powerful combination.
