Overview – Operating Within Our Locus of Control
How often have you wanted to change something, only to dread the reality that you are powerless to do anything?
Maybe you want to make the rain go away and to see the sun again, or perhaps you want to undo a grave mistake you just made.
As you may already know, there are some circumstances in life that are simply well beyond our locus of control. No matter how frustrated, desperate, or distraught we are, there are some things that simply cannot be affected by our actions.
There are many things in investing that are well beyond an investor’s locus of control, yet some investors still refuse to accept this reality.
We Love to Control Our Own Destinies
In the book Smarter, Faster, Better, author Charles Duhigg tried to unravel a conundrum that was observed in some U.S. Nursing Homes.
Duhigg found that, among the residents of some Nursing Homes, some dreaded their experience and had very little motivation to go about their daily lives. On the other hand, there were residents who were in good spirits and loved their daily lives.
Of all the myriad factors that contribute to the mental health of a senior living in a nursing home, was there an explanation behind the residents who loved and dreaded their daily lives?
Interestingly, there was: residents who frequently exhibited rebellious behaviours were the ones who were enjoying their time the most.
Now, “rebellious” doesn’t necessarily mean these residents were harming others or staff, but rather they liked to live life on their own terms, and not on the terms of the nursing home.
For example, these dissident residents would customize their meal menus, select their own TV channels, and move furniture around in their rooms. Other residents simply let the staff dictate their choices and simply played by the rules.
Duhigg found that residents who felt they had some form of control over their lives enjoyed their time more. Their sense of control gave them the motivation that allowed them to enjoy their time more.
These observations Duhigg found aren’t just limited to Nursing Homes. Research has found that our need to feel in control is a biological imperative for survival.
No wonder we start to get stressed out when we feel that our ability to maintain control is being taken from us. Most people, myself included, would probably start to get very stressed if their vehicle’s steering or braking started to fail – we’re no longer in control.
So, humans biologically love to be in control of their destinies, but what happens when we encounter situations that fall outside our locus of control?
Stressing Over the Uncontrollable is Futile
In investing, there are many variables that are well beyond an investor’s locus of control.
Daily stock prices, market index values, market conditions, etc: the list of things well beyond an investor’s influence goes on endlessly.
So many variables are beyond an investor’s control, and will never be under an investor’s control. Despite this, investors still choose to stress over these uncontrollable factors.
Earlier we discovered that we humans are biologically hardwired to favour control. However, investing is by far the most psychologically gruelling environment for us because the rules of investing constantly defy our psychological predispositions.
As investors, we operate in an environment where so many factors are well beyond our locus of control. So, we are forced to accept the reality that there are some things we simply cannot change no matter what we do.
The sooner an investor accepts the reality that there are variables that are simply beyond their locus of control, the better. That way, they don’t need to spend so much time and energy worrying about something they clearly can’t change.
Investors stand to gain nothing by getting stressed over uncontrollable events. An investor who continues to reject this reality will only end up getting overly emotional, which ultimately leads to bad decisions.
Losing sleep over uncontrollable factors will do an investor no good. An investor is only doing a major disservice to themselves by spending energy on things that simply won’t budge.
Instead of worrying over things beyond our control, investors are better off figuring out what they can control, and direct their energy towards those things.
Understanding Your Locus of Control as an Investor
Below is a visualization of my thought process when I need to make some sort of major decision that depends on my actions:
When I’m faced with a decision, one of the very first things I do is make this categorization. By doing this, I have a clear idea of what actions I can potentially take. This also helps me reduce the likelihood of succumbing to analysis paralysis.
Take market crashes, for example.
During a market crash, chaos abounds. Stock prices are in free fall, market indices are consistently in the red, and the only thing on many investors’ minds is “sell now”.
Emotions and stress run high during a market crash, and it’s so easy for an investor to succumb to the pressure in a desperate attempt to try and save their financial future. So many variables are beyond an investor’s control here.
However, there are still some variables that fall within an investor’s locus of control.
An investor has full control over their ability to buy or sell. Markets may be screaming at an investor to do one or the other, but at the end of the day this authority rests solely on an investor’s shoulders.
Investors also have the ability to decide how they respond emotionally. Just because everyone else is panicking doesn’t mean an investor needs to succumb to the mayhem. An investor has the ability to choose whether to take a deep breath or start screaming along with everyone else.
During a market crash, investors may not be able to control asset prices or what the market will do next, but they have the ability to decide not to panic sell, take a step back, and rationally observe what the markets are doing.
Successful investors understand what they can directly influence, and stay strictly within their locus of control. Dedicating time and energy beyond their influence will do them no good.
Successful Investors Operate Within Their Locus of Control
Have you ever noticed that during a major market crash or economic event, no high-profile investor tells the public how stressed or afraid they are?
I’ve yet to see Bill Ackman, Ray Dalio, Seth Klarman, Warren Buffett, or Charlie Munger publicly express panic during a market upheaval. I doubt these high-calibre investors panic in private either.
That’s because they know that there’s no point stressing over things beyond their locus of control. These individuals are successful investors because they stay well within their locus of control.
I don’t claim to be on the same level as the investors I mentioned above, but my investing career so far has been relatively smooth because I focus my time and energy on things I can directly influence.
So far, I can say with confidence that focusing on what I can directly influence has served me very well, and I’m sure it will continue to serve me well in the future.
As an investor, you don’t need to have control over everything. What matters the most is you have control over as many variables that can directly affect your portfolio.
Wrapping Up
So many things go on around an investor on a given trading day, and so many of these things are well beyond an investor’s ability to control them.
As humans, we love the ability to control our own destinies. However, as investors, we need to understand that not everything will fall within our locus of control.
Instead of stressing over what we can’t influence, an investor is better off dedicating their time and energy to identifying what important variables fall within their locus of control and focus intensely on those select variables.
An investor gains nothing by stressing over the uncontrollable, but an investor stands to gain a lot by focusing on what they can directly influence.
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