Overview
The last book I read in 2020 was Invested by Charles Schwab, Founder and Chairman of the eponymous Charles Schwab Corporation, an American financial services company.
Invested is filled to the brim with countless business and investing lessons, with several quotes and bits of wisdom sprinkled throughout the text.
Of all the quotes that Charles Schwab shared, there was one quote that particularly stood out. That quote was:
“I’m an optimist, and investing has always seemed to me to be the ultimate act of optimism. You’ve got to have confidence that the money you invest today is going to grow; otherwise, you might as well stuff it under the mattress. You have to believe tomorrow will be better than today.”
There is no shortage of discussion about how to best analyze a company, which metrics to focus on, and many other technical investment topics, but this quote reminded me that beyond the analytical and quantitative side of investing there is also the human element.
Investors can easily forget that they operate at the intersection of art and science. As our technology continues to advance and society ruthlessly continues to pursue better financial returns, the human element of investing is quickly becoming forgotten.
Emotions Aren’t Necessarily a “Bad” Thing
I’ve repeatedly talked about the importance of separating your heart from your head when it comes to investing.
Countless investment mistakes have been made in the past because investors allowed their emotions to override their logical thinking. Whenever we make investment decisions based solely on our emotions, the consequences are almost always disastrous.
So, the struggle every investor constantly faces is the continued separation of heart and mind. Even the most disciplined investor can make an emotional decision if enough pressure is placed on them.
While there are countless articles, videos, and books about keeping our emotions in check, there seems to be a lack of content emphasizing the importance of promoting positive emotional responses.
When it comes to investing, emotions aren’t inherently an “evil” thing. To say that an investor needs to be emotionless is essentially telling an investor to throw away their humanity – to be human means to have emotions. Problems arise when negative emotions swell to the point that they overtake our decision-making.
Emotions, if used properly, can be a source of strength for an investor. It’s difficult to argue that hope for a better tomorrow is a bad thing for investors to believe in, nor would it make much sense to rebuke an investor for looking forward to what lies ahead.
Keeping your emotions on a tight leash is a vital skill for any investor to have, yes, but that doesn’t mean discarding our emotions entirely. At their core, investors can be thought of as being “logical optimists”, that is, they are hopeful for a brighter tomorrow, but their hopes are kept in check by reality and the facts.
Investing is a Prolonged Test of Optimism
Although investing seems complex, at its core it really isn’t. Investing is essentially the act of putting money down today in the hopes that you will get more money in the future. This is a very rudimentary view on investing, but that’s essentially what it is.
Because investors give up money today that they could’ve spent, they are implicitly placing their faith in a better tomorrow. After all, an investor wouldn’t bother giving up money today if they weren’t optimistic that it will grow in the future.
There are many reasons that an investor may choose to divest, but the one reason implicit to all divestment decisions is that the investor is no longer optimistic about the future of that investment operation. At its core, choosing to sell any sort of asset is partly an emotional decision.
On the flip side, an investor may choose to hold certain assets for what seems like an eternity because they continue to be optimistic about the asset’s prospects. If an investor has faith that their assets will continue to enjoy brighter days ahead, then there really is no compelling reason to sell them.
At the end of the day, investors who stay for the long term choose to do so because they are implicitly optimistic about their decisions, and are optimistic that the money they are giving up today will multiply in the future.
Each passing day that an investor chooses not to divest means they continue to remain hopeful about the future of their investments, otherwise, they have no reason to continue holding those investments.
Optimism Should Always Be Justified
While being optimistic plays a role in successful investing, it’s important to remember that there should always be reasonable limits when it comes to expectations of the future. Being too optimistic about the future could potentially start the dangerous transition from investing to speculating.
It can be argued that speculators are those who have excessive, unjustified optimism – they buy assets not because their analysis tells them an asset is worth buying, but rather because they simply have high hopes for the asset.
An investor’s sense of optimism should always be justified – that is, their optimism is a result of thorough analysis showing that an investment operation has a high likelihood of rewarding them in the future. Optimism should always be a by-product of thorough analysis, that is, a feeling of optimism is “created”.
Problems start to arise when the order is reversed: optimism precedes thorough analysis, or worse, analysis is skipped altogether. Purchasing a stock, bond, or other assets simply because you are optimistic about their future, without any sort of factual basis to justify that optimism, is a classic example of speculation.
Learning to manage your emotions is similar to working with a fire that won’t go out: you can’t extinguish the flame, so your second best option is to keep it under control to the best of your ability. Failure to keep the flame properly contained will quickly engulf you.
Wrapping Up
Part of being an investor means being optimistic about the future. There’s no point putting your money into an investment operation if you don’t believe that it will produce an adequate return in the future.
Being an investor doesn’t mean getting rid of your emotions. Every decision an investor makes has some element of emotion behind it – an investor chooses to sell because they implicitly have lost faith in their investment, and an investor chooses to buy because they are implicitly optimistic about the future.
While being optimistic is important, investors need to remember that optimism should always be justified by the facts. Being optimistic without any sort of factual basis can lead an investor down a path of eventual speculation.
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