It is okay that investors are not 100% rational

By | CYH

I loved to draw when I was young. And I scored pretty well in art while in school.

But I don’t count myself as an artist. Far from it. I had no intention to become an artist.

Maybe because I was told that it was hard to make a living off art.

Or maybe because I was more inclined towards science.

I was on the science track since secondary school. When I was in junior college, the form teacher asked the class what we wanted to study in university. Majority of the class, including myself, chose engineering.

Indeed, I studied engineering in university. There was not even a shroud of doubt. It was decided long ago. The only question was which university.

But I did not work as an engineer after I graduated. I had no interest in it after I fell in love with investing.

The science was still very much in me and I carried it into investing – I loved the quantitative approach because it gave me more objectivity and control of the process. It was also easy for beginners because one can follow the steps of a well-designed investment system as opposed to the need of having sufficient experience to evaluate businesses.

I could understand the importance of tracking investment performance so that there’s a feedback loop to evaluate if my investing system is working.

Science is grounded in rationality and an antidote for investing biases.

I prided myself being more rational than other investors because I did the above. I have been preaching to convert the others to adopt my definition of a ‘proper’ investing behaviour.

The chapter Reasonable > Rational in Morgan Housel’s book (The Psychology of Money) challenged my thinking,

“A rational investor makes decisions based on numeric facts. A reasonable investor makes them in a conference room surrounded by co-workers you want to think highly of you, with a spouse you don’t want to let down, or judged against the silly but realistic competitors that are your brother-in-law, your neighbor, and your own personal doubts. Investing has a social component that’s often ignored when viewed through a strictly financial lens.”

There’s a human element to investing. It isn’t pure science or 100% rational. And it is okay.

Not everyone like me is going to have the conviction to stick to an investment strategy. The stock market is volatile and compounding effects require long duration to work its magic. An investor who lacks conviction would easily bail when the strategy is hitting a rough patch.

On the contrary, biases may serve these investors well. If they love what they have invested in and truly believe in the companies they partly owned, they may be able to stick with their investments through the ups and downs and reap the long term returns eventually.

Maybe it is also a blessing that the majority do not track their investment performances. This would make them less anxious and keep them invested. They are not professionals who need to report results periodically. Cut them some slack. As long as their wealth are growing at the end of the day, what’s the fuss?

Searching for the best performing stocks or investing strategy is overrated.

Achieving high rate of returns is overrated.

Staying invested is underrated.

Long term investing is tough enough. Don’t make it harder. I need to accept that investing does NOT need to be 100% rational. Make it reasonable is good enough.

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