Why are most people so bad at investing?

It seems that in most things in life that we try, we quit right before the big payoff. Just like a tiny plant that is about to break the surface of the Earth, our life is about to change but we seem to get frustrated and stop trying. Sometimes we look back in hindsight with regret that we didn’t continue on just a bit further – we ask ourselves why we stopped watering the plant at exactly the wrong time?

This phenomenon seems to hold true with investing. Many people attempt to invest their savings in a wise way. They want to make their money grow and I’m sure they do their best to invest well and invest properly. Most of the time, however, we’re all really bad at actually accomplishing that goal. I’m not quite sure why that is, but I’ll postulate.

One problem might be that we pick the wrong stocks at the wrong time. Instead of buying based on the fundamentals of a company, as traditional investment theory would advise us to do, we buy a stock because we got some hot tip or the financial media seems to be covering the company more.It also might be because of a general lack of financial knowledge, which causes us to not fully understand the risk-reducing benefits of proper diversification. Maybe it’s because we’re trigger happy, too quick to buy and too quick to sell on impulse and not able to stick with our investments over a relatively sufficient period of time for momentary market fluctuations to not matter much.

But when you think about it, it doesn’t seem to be in human nature to think for the long term or to be calm and collected in the face of mass hysteria or bad news. It seems like it’s more in our nature to go with what the whole pack is doing. It’s also in our nature to minimize worst-case or catastrophic scenarios, however, slight the chance of them might be. That may be why we’re sometimes too quick to sell. If we just wait a month and then rethink it, maybe we wouldn’t sell. But we don’t wait the month because we don’t want to lose our entire investment. It’s better to leave with a small loss than lose everything we’ve invested. A big win isn’t the equivalent of a big loss in our minds. A big loss holds more weight.

We can’t escape the inner workings of our minds, minds that have been shaped by thousands of years of evolution and minds that aren’t equipped to handle the concept of patience or to perform a logical analysis of risk. Knowing that, it’s pretty amazing that we’re even as good at investing as we are.

I guess, when it comes to it, we have to admit that we weren’t meant to be investors. If you believe current science, we were meant to run on the plains of Africa, eat, sleep, and have sex. The deepest parts of our minds have not placed for what is required to be an excellent investor in today’s artificial world. Some of us are great investors, however. Why is that? I postulate that the greatest investors are able to be so successful not due to their ability to fully embrace their human nature and potential, instead of trying to fight against it. But, that’s a story and a discussion for a different day.

Takeaways

1. To become a better investor, try to be more conscious and more mindful of your emotional reactions to things in the news, to fluctuations in your portfolio, and to your desires to buy or sell. Do this for a while, and you’ll see patterns in your thinking and you’ll be able to back away from them to a more rational place in your mind. In that rational place, do some real thinking and analysis about whether whatever you’re going to do is actually a good idea for you based on your investment strategy, time horizon, risk tolerance, values, and preferences. This isn’t easy, but if you want to become a better investor, you must have to courage to do this.
2. At some point, you’ll be tested by a deep drop in prices during an economic downturn or recession. When this happens, take an entire day to look through your investing history. See where your portfolio was one year ago, three years ago, five years ago, ten years ago, and twenty years ago (if you’ve been investing that long). You’ll hopefully see how time makes momentary fluctuations (even big ones) seem irrelevant. If, however, you see that you have been a frantic and manic investor, then you must find the discipline and the courage to do some rational analysis. If that’s too difficult, it might be a good idea to speak with a good friend or family member who you know is a skilled investor or with a good financial advisor. Never underestimate the damage you can do to your portfolio and to your financial well-being due to frantic emotions and panic.