In an emotionally driven society where fundamental reason takes the backseat to whimsical fervor and following your heart is cherished above all else, investing can be a complicated affair. Personal experience is often a determining factor in investments that drives the decision making process. A past success yields future confidence whereas a past failure can produce healthy reluctance to unneeded risk. Reliance on memories, however, is only beneficial to an extent. Furthermore, the line at which memories become harmful to investment success is crossed more often than not. This overdependence on the emotions tied to memories negatively affects investment decisions as it hinders one’s ability to think logically.
The stock market is largely a numbers game; trends can be analyzed over time and give investors statistical advantages. The mathematical nature of investing necessitates a rational, scientific approach in order to be successful. Simply put, emotions should be left out as much as possible. For instance, in the personality quiz, the question asks whether or not the chance of landing heads or tails changes if tails is flipped four times in a row. Although it is clear that the probability of flipping heads or tails is fifty percent regardless of the past flips, investors can often overcomplicate a similarly simple investment situation by letting their emotions get the best of them. The investor dwells upon the memory of the last investment outcome and allows insignificant details or superstitions to affect future decisions, thus leaving less room for math based rational. However, setting aside emotion does not mean that memories are entirely averted, rather one must emotionally detach from the memories.
This separation of emotions from memories does not mean risk free investment; instead risk is encouraged when opportunity presents itself. According to the quiz, I am a strategist, both risk tolerant and ambitious. This assessment fits as I consider myself both math-minded and competitive. I hold fast to an evidence-based, scientific approach to investing while always looking for a competitive advantage or the next novelty in my portfolio. Discernment between my memories and emotion comes easy to me as I recognize the subconscious motives behind my decisions. As a natural investor, I value opportunity and understand that the fundamentals of an investment requires some risk to be taken to produce profit.
Additionally, a sound, disciplined approach to investing is an excellent supplement to any investing strategy. All of the natural skill alone cannot compete with a meticulously implemented investment plan. Though the strategist investment personality seems ideal for investing, it lacks a mediating step that allows the investor to put his or her thoughts into action. Just as a football team is insufficient without a coach, so an investor is at a disadvantage without knowledgeable financial advice and preparation. A thorough investment approach could take the shape of individual research or a financial advisor, or could even be as simple as saving money or establishing long term investments. With my personal investments, I have begun to add this sort of discipline to my natural investing skill via long term investments in the form of a Roth IRA. While many students my age aren’t thinking this far in the future, I am exercising a disciplined investing strategy that gives me a competitive edge.
Navigating the investing world is a challenging feat in this day and age. The volatility and unpredictability of the market can make seasoned investors look like amateurs. The only aspect of investing you can control is your actions and how you respond to your circumstances, therefore, don’t rest on your laurels and don’t dwell on your failures.
When I was young, I discovered a quote by Albert Einstein that declared: “Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.” This quote stuck with me, and I made a promise to my young self that I would do everything in my power to use this “eighth wonder of the world” to create a large fortune for myself, my family, and my close friends. While there are many individuals who have built their own empires of wealth, I became particularly fascinated with one man: Mr. Warren Buffett. There were many reasons for this, but the two most prevalent were his simplistic, ethical personality and the amount of wealth that he had compounded for his shareholders. Naturally, my fascination with Buffett led me to Mr. Benjamin Graham and, consequently, The Intelligent Investor and Security Analysis. Myself being somewhat of a social outcast, the concept of value investing and having a contrarian viewpoint sunk in immediately. I felt as if I had discovered a hidden gem that worked marvelously with my personality. Furthermore, the Brandes website has provided me with some fantastic activities and opportunities to help nurture my passion for investing.
I received “Risk Tolerant, Thinking” on my quiz. While I agree with much of what the results state about being a “Strategist”, I disagree somewhat on the “Risk Tolerant” portion. Ben Graham in Security Analysis states, “An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.” I believe in this statement, and I try to identify a wide margin of safety whenever I make an investment. Risky investments, even if carefully analyzed, don’t follow the “safety of principal” portion, and I believe they fall under the “Intelligent Speculation” category. I prefer to invest without taking on large amounts of risk, and like Mr. Mohnish Pabrai states in his book The Dhandho Investor, it is very effective to look for low risk, high uncertainty investment opportunities.
While I do believe that good investment practices can be learned by anyone, I think it takes a certain personality to buy into the concept of value investing. It is common belief that the concept either takes with a person immediately or doesn’t resonate no matter how much explanation is performed.
I think the idea that investors are heavily influenced by their past experiences is fascinating. For example, Ben Graham looked for extremely safe investment opportunities probably because of his experience during the Great Depression. Warren Buffett, whom Graham taught at Columbia University, says that Graham missed many opportunities because of the ultra conservative viewpoint he held. After studying famous investors and their experiences, I started to look at my own background to see if it would have an adverse effect on my investment philosophy. I think that I hold a pretty conservative view partially because of my remembrance of 2008, but not to the extent of Ben Graham. Also, I have not experienced great growth in the stock market since I started paying close attention to equities. Because I have seen very slow growth in the market, I am somewhat skeptical to believe that a market-wide 9% yearly return is reasonable, but I do believe in the power of America’s economic machine. I am glad that these experiences have instilled a conservative and skeptical mindset in me, and I don’t believe they will hinder my ability to produce high returns during my lifetime. Knowing these things about yourself is of huge importance when investing.
Memories negatively affect individual investment decisions. As humans it is our nature to adapt based on past experiences. As a result, outcomes from past investments can and do negatively affect individual investment experiences. If an individual in their past made an investment which resulted in a loss, this can negatively affect their future investments. They will recall the loss and act too cautiously in their future investments and as a result miss out on many opportunities. If in the past an individual made a risky investment which had a good reward, they will be more inclined to take risks in their future. As a result, they may suffer huge losses taking risks that they should not have.
To be a successful investor both a disciplined approach and natural skill are important, but I believe natural skill is most important. While certain important aspects of successful investment can be taught and used in a disciplined approach, some skills cannot be taught. Having natural patience and instinct is more important for investing than anything. From the quiz I learned that I possess an investing personality. This means I evaluate investments using logic and not emotions, but I also am very cautious due to fear of losses. My fear of losses could be fixed, however by using a financial advisor who could recommend when I should take risks. On the flip side, as someone who is naturally logical when evaluating, I do not believe that is a skill that can be taught through a disciplined approach; it is a natural skill. For these reasons, I believe natural skill is more important when becoming a successful investor.
The quiz revealed I am an investing personality which I completely agree with. As an investor I evaluate logically over emotionally. For example, I have often times sold items that mean a great deal to me because I knew the cash reward could be saved and better assist me in the long run. I am also cautious and avoid situations with large risks. This tends to be true also. When I was choosing a college to attend I wish I would have broadened my horizons. Because of the risk associated with moving out of state, I did not consider any of those colleges. I have a younger sister who is now exploring colleges out of state and I am proud of her for taking the risk I could not. I think this also is a great indicator of why my cautious nature could be a negative side to my investing personality. I hope to learn how to take more risks while still being smart about saving my money in order to support my future.
I am a firm believer in the teachings and beliefs of the father of value investing, Benjamin Graham. One of my favorite quotes from Graham’s book, The Intelligent Investor, is, “invest only if you would be comfortable owning a stock even if you had no way of knowing its daily share price” (Graham, pg. 36). Graham is saying that an “intelligent” investor should be comfortable not knowing the share price of a stock that he or she invested in. This is true because they invested in a company that they thoroughly analyzed by looking at the soundness of the company’s business and the fundamentals of the company. Furthermore, the “intelligent” investor is comfortable not knowing the share-price of a stock because their in-depth analysis of the company has provided them with the value of the company.
Graham’s quote relates to how I invest in stocks. I make investment decisions based on a thorough analysis of the company and not on speculation. The quiz results confirmed this investment methodology as it designated me as a “Strategist”. The quiz states that I am “driven by analysis and evidence” and that I “focus on the rational examination of the fundamentals of an investment evaluation of my investment decisions”. Both of these statements perfectly describe the way I invest, as well as the investment method I believe everyone should follow if they want to be successful. Additionally, I think that in order to be a successful investor it is more important to have a disciplined approach than to have a natural skill.
I do not believe that anyone can have a natural skill in investing, especially when investing in the stock market. A natural skill in successfully picking stocks would be similar to having a natural skill in the picking numbers for the lottery and winning, which is highly unlikely. I do think people can have natural skills, like a Strategists natural ability of “balancing their search for opportunities with potential risk”, which can facilitate their success as an investor. However, this natural skill alone will not make one a successful investor. Only through a disciplined approach, which takes time to learn and develop, do I believe one can truly become a successful investor. There is no exact formula for this disciplined approach, but as a Strategist I believe an essential part of ones disciplined approach is the ability to thoroughly analyze the business and fundamentals of the company. Additionally, I believe that emotional control is another key aspect of a successful investor’s disciplined approach.
I believe emotions can play a very significant role (good or bad) in how an investor makes an investment decision. These emotions often stem from memories of past investment decisions. Take for example a concept I learned in my equity investments class this past semester, the behavioral finance bias of Loss Aversion. It is a bias based on past memory and one that we probably have all fallen prone to. The Loss Aversion bias occurs when an investor is making an investment decision that has a high probability of being profitable, but remembers the feeling of past failed investments and profit losses. He or she then over values the potential for loss versus gain in the current investment decision, and decides not to make the investment due to fear of loss. Thus, I do think memories/emotions can negatively affect individual investment decisions. However, I think in order for one to become successful investors he or she has to overcome these emotions/memories and I believe one can overcome this through a disciplined approach.
Graham, Benjamin, and Jason Zweig. The Intelligent Investor: A Book of Practical Counsel. New York: HarperBusiness Essentials, 2003. Print.
My main area of study is political psychology. It gives insight into the decision making process and what people hold to be significant information. Remarkably, most individuals depend almost exclusively on heuristics, or mental shortcuts, when making important decisions. These shortcuts are the product of experience, and they are largely uninformed. This tells us is that lived experience is more likely to hinder a decision than improve it.
Memories are fickle, and most are unreliable. People tend to assume that memories are snapshots of events permanently saved and available to access when the need arises. Instead, they are more like abstract paintings. The significance and meaning behind a memory is open to interpretation, and worse the memory itself can be false or incorrect in some areas. As a source of information, it is unreliable in most instances. Only when coupled with credible and accurate data can memories serve a purpose by informing a decision, but by itself they are more likely to serve a negative purpose.
A successful investor would not be one that is naturally skilled. Their success is not the product of assured knowledge, but repeated chance that has no future guarantee. Investments are long term goals made up of short term decisions, and a successful investor is aware of that and is disciplined with their financial management.
A risky investment, I believe, is a misnomer. The only true risk is when an investment is made on little to no information, or when the information shows a greater chance for failure than success. Any knowledgeable individual can easily determine those invests should be avoided. Instead, people use the phrase risky investment when there is a high, but not guaranteed, chance of return. These are not risks, but calculated and informed assumptions on the chance of return. Discipline, not natural skill, is what determines success, and I live that each day.
I believe the assessment made about myself is generally accurate. I am a strategist. I don’t make financial decisions without information, and my pursuit of an education is a reflection of that. It is a personal investment that I calculate to yield incredible return with virtually no risk. I am confident in my abilities to succeed academically and financially, and that confidence is rooted in my achievements thus far. Hopefully this essay and my quiz results display that to each of you. Thank you for this scholarship opportunity, and I appreciate your time.