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Three Mental Hacks for Better Investing Thumbnail

Three Mental Hacks for Better Investing

Our brains are amazing organs that have incredible capabilities. With 86 billion nerve cells, we can speak multiple languages, interpret body language and comprehend millions of data points throughout a life. 

Along with this power are the emotions that stem from our brain’s processing of information. These emotions have served us well in our evolution from hunter-gatherer times to today’s service based economy.

Simply knowing that emotions can override the logic and power of our brains is not enough. The power of our brains must be utilized in the most efficient manner possible. 

Don’t Mistake Activity for Outcomes

In about every aspect of our life, we find success by identifying what works and repeating that action. The more we do, the more success we find. This is especially true for business owners and executives who find their niche and execute their abilities every day.

This mindset can quickly become an incredibly problematic approach for investors.

In Daniel Crosby’s excellent book “The Laws of Wealth: Psychology and the secret to investing success”, he outlines a few startling facts from prior investors.

  • Studies have found that the most frequent traders lose 4% of their account value each year, due to costs and market timing.

  • Investors who frequently trade end up trailing buy and hold investors by 1.5% per year.

Studies have found that the most frequent traders lose 4% of their account value each year, due to costs and market timing.

Frequent traders are well intentioned. They fall into the trap that trying hard must mean doing more, and if at first you don’t succeed, trade, trade and trade some more. After all, simple hard work is a common way to generate wealth in the first place.

The problem with this line of thinking is that the focus is on activity, not outcomes. 

We are not advocating doing nothing and ignoring the news and markets. But business owners and executives should be focused on why they are investing in the first place--achieve their personal goals. 

In order to achieve these goals, investors should take steps that deliver the greatest likelihood of success. This may alter the amount invested in stocks or making tax-efficient decisions around major life decisions. But since more trading activity has been linked to lower returns, investors should not think that more activity means a better outcome.

Market Timing

In investment circles, Japan was the talk of the town back in the 1980’s. Their stock market was reaching all-time highs, as stock prices surged to 60 times earnings

Long-term valuations broke records, with CAPE exceeding 90. By comparison, the dot-com bubble reached a mere 40 in the U.S. And Japanese real estate surged to a collective valuation of 2,000 trillion, which was 4x the entire value of all U.S. real estate.

Then the bubble burst, as the Japanese stock market has yet to regain its all-time high set in 1990.

Japanese investment bubble

Source: Macrotrends

So there’s no doubt that bubbles exist. Logically, investors believe they can use their brain and intelligence to identify these bubbles.

Unfortunately for investors, there is mounting evidence that market timing is a flawed strategy. A 30-year study found that investors trying to time the market underperformed by 4.7% per year. Given the long-term nature of this study, multiple bear markets occurred on average, giving the investors plenty of opportunities to outperform.

What these investors fail to understand is that success in investing isn’t timing the market. It’s time in the market.

What these investors fail to understand is that success in investing isn’t timing the market. It’s time in the market.

Properly diversified investors should have investments across market classes, geographies and company types. This helps soften the blow from any one bubble, allowing your net worth to grow for the long-term.

Thinking Buffet, not Buffett

“I buy a farm and I don't get a quote on it for five years and I'm happy if the farm does ok. But people buy a stock and they look at the price the next morning and they decide if they're doing well or not doing well. It's crazy because they're buying a piece of a business.” - Warren Buffett on frequency of market prices

Twenty years ago you called a stock broker to get a price. Today, you can get live pricing, up to the millisecond. Refresh your screen and find out whether you’ve just made money. 

In doing so, you’re consuming an endless amount of data. It’s an all-you-can-eat buffet of market prices. 

The result of this buffet is that you’ve trained your brain to think in the short-term. This overload of data results in the same dissatisfaction when you’ve gorged on an all-you-can-eat buffet of market prices.

Train yourself to think more like Buffett, not buffet.

Earlier we learned that focusing on activities has been found to lead lower returns. And ultimately, results are what matter the most. So focus on your goals and working towards them.

For most clients we work with, they can maximize their net worth by focusing on their careers. Searching stock quotes at lunch takes you away from responding to that old email or following-up on a pressing item. It’s unproductive.

If you’re committed to improving your financial knowledge, we suggest reading fundamental studies on investing. These whitepapers, books and studies compile decades of data to give long-term trends that investors can use to grow and protect their net worth.

There are 117 clinically diagnosed behavioral biases. We all have one. It’s our job to be aware of how the brain can influence our behavior and mitigate these effects. 

This report was prepared by Delta Wealth Advisors a federally registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Delta Wealth Advisors Form ADV Part 2A & 2B can be obtained by written request directly to: 350 Massachusetts Ave., Suite 300, Indianapolis, IN 46204. Neither the information nor any opinion expressed it so be construed as solicitation to buy or sell a security of personalized investment, tax, or legal advice. The information herein was obtained from various sources. DWA does not guarantee the accuracy or completeness of information provided by third parties. The information in this report is given as of the date indicated and believed to be reliable. DWA assumes no obligation to update this information, or to advise on further developments relating to it.

The mention of specific securities and sectors illustrates the application of our investment approach only and is not to be considered a recommendation. 

An index is an unmanaged portfolio of specific securities, the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Investors cannot invest directly in an index. An index does not charge management fees or brokerage expenses, and no such fees or expenses were deducted from the performance shown.