Emotional Intelligence: How to Use the Psychological Aspects of Investing to Your Advantage
The Emotionally Intelligent Investor & Weekly Activity
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The Role of Emotions in Investing
I’ve read many investing-related books over the years; however, I just finished one that is probably the most impactful/applicable book I’ve ever read. This book is called “The Emotionally Intelligent Investor” by Ravee Mehta. It goes in-depth on how you can use self-awareness, empathy, and intuition to your advantage in investing. After all, the stock market is ultimately driven by human emotion, so I believe it’s important to talk about this and how we can use these unique attributes to improve performance. So, let’s dive into it!
Investing is often described as a rational pursuit. There is a stigma that successful investors must analyze facts, understand complex financial relationships/statements, and predict future trends. Not saying this isn’t important, because it most definitely is, but there is a much more important piece to this puzzle. This is the equally critical, and often neglected, aspect of successful investing… which is emotional intelligence. Emotional intelligence involves understanding one's own feelings and the feelings of others and using that understanding to inform sound decision-making (Ex: Buying when everyone is fearful, when others around you criticize you for accumulating in the tough times). In the world of investing, emotional intelligence can mean the difference between success and failure, it’s quite incredible how vulnerable humans can be in times of fear or euphoria. Many are too smart for their own good, which results in analysis paralysis, ending up with market underperformance or average returns (not a bad thing to be average). Many treat the stock market like a casino and invest blindly off their neighbors “hot stock” idea. Many will let MSM/Social media dictate their decision-making, when this has been proved for over a century that these platforms go for ratings and are not in your best interest (Sell everything! Run for the hills!). Many… well you get the point. We have been taught our entire life to be coldly rational, when we should just aim to be reasonable… and this applies directly to investors in the stock market.
Investing isn't purely a numbers game. Our emotions play a crucial role in how and why investors make certain decisions. Fear, greed, regret, and overconfidence are just a few of the emotions that can significantly affect our investing decisions. We saw this all throughout 2020 & 2022, it’s kind of sickening to see the same people get sucked into the doom and gloom narrative, then the same people go on to call the stock market a “scam”. For instance, fear and greed often drive market trends. During a bull market, greed can lead to overbuying, and during a bear market, fear can lead to overselling. Both actions could result in unfavorable investment outcomes. Regret could make investors hold onto losing stocks for too long, hoping they will rebound. Overconfidence can lead to excessive trading and risk-taking.
Understanding and managing these emotions is where emotional intelligence comes into play. Emotional intelligence is the ability to recognize, understand, and manage our own emotions and the emotions of others. In the context of investing, emotionally intelligent investors are able to identify and understand their emotional reactions to market events and use this awareness to inform their decisions rather than acting impulsively. They are aware of their risk tolerance and do not allow fear or greed to push them into decisions that are not aligned with their investment goals and strategy (this is what will separate you from everyone else).
Building Emotional Intelligence as an Investor
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