“What is needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.” Warren Buffett
It was fall of last year that I really became interested in stoic philosophy and how it could apply to modern living. A great introduction to stoicism is, A Guide to the Good Life: The Ancient Art of Stoic Joy by William B. Irvine. If you have any interest in philosophy, particularly the stoic philosophers, then Irvine’s book is a great introduction. Since that time I’ve continued to learn more about the Stoic movement of both Greece and Rome as well as some more popular individual practitioners, such as Epictetus, Seneca, and Marcus Aurelius. Today I want to offer a glimpse of how the basic teachings of stoicism can help us all become better investors.
As Buffett noted above, what is needed is a sound intellectual framework to aid us in our investment activity. One of the reasons I adopted dividend investing as the foundation of my investment strategy is that it gives such an intellectual framework suggested by Buffett. There are thousands of stocks out there to choose from; by narrowing the selection down to the dividend payers with acceptable yields you have reduced the amount down to a more manageable list. From here you can add other criteria such as payout ratio, dividend growth, length of dividend payment, and debt level to name just a few. As a new investor it was important for me to have a screen in which I could narrow the world of possibilities. Depending on your goals you may have a very different approach to investing. It’s not so much which approach you choose, but that you have one that is most important, otherwise you’re just drifting along allowing the enthusiasm or depression of the market to guide your attention. It’s never a good idea to take advice from a manic-depressive like Mr. Market. Now that we have our framework lets look at the other point Buffet brought up, controlling emotion.
Emotions are tricky creatures. They are also stealthy and have a way of controlling our behavior without us even being aware of it. Never forget that we were emotional beings way before we became reasoning beings. These emotions allow us to appreciate love, companionship, beauty and a host of other feelings that make living an enjoyable experience. However, when it comes to money/investment decisions, you would be wise to seek the counsel of reason rather than rely on the capriciousness of emotion. How do you know when emotion is likely the one controlling your investment thoughts? A good rule of thumb is to step back and ask yourself if you are feeling especially fearful or greedy. If you detect either of these it’s safe to say that emotion rather than reason is calling the shots. If you can get to the point to where you make your investment decisions based on reason you will know because reason will be indifferent to what your choice is. It will weigh the risk vs. reward without bias, without concern for your greed or fear. In a word, you will be emotionally detached from the decision-making process.
One of my first experiences with this was when I started investing in NYB. If you have looked at my portfolio you will notice that NYB represents my largest position. Although some may question the wisdom in investing in a bank these days, I had done my homework and felt that NYB was a solid bank to invest in. Here is where the practice of setting aside emotion and relying on reason comes in. I didn’t stake my position in NYB all at once. I actually built the position up over the course of five separate occasions. Purchasing a stock and immediately watching its value decrease and then continuing to buy on four other occasions was hard to stomach. I doubted myself each time I bought more shares. My fear was working overtime. I made those purchase each time NYB had hit a new low, after all this is what you’re suppose to do right, buy low? Knowing it is what you’re suppose to do and then actually doing it are two different things. It was an exercise in averaging down by purchasing shares at lower costs and higher yields as well as trusting my judgement. Could I be wrong? Of course. That is a risk you can’t eliminate 100%, the risk that you could be wrong.
That leads me to the title of this post, how stoicism can assist us in becoming better investors. One of the principles of stoic philosophy is that man has a purpose just as everything else has a purpose. To a stoic, mans purpose rests in his nature and his nature is that he is a reasoning being. Our capacity for reason separates us from the other animals, it secures a unique place amongst the other living creatures of this earth. When we use our capacity to reason we are being true to our nature. We have the ability to use our reason when we make investment decisions and the more we make these decisions from a place of detached reason, we put our emotion in check and take the reins from their unpredictable hands. The more we exercise this ability the better we get and that will serve us well over time. We can’t always make the right decision, even if we are using reason to the best of our abilities it is still possible to make the wrong decision, or a decision that was made for the right reasons, but still had a poor outcome. If we allow our emotions to overtake us we are doomed to be at the mercy of a market that carries us on a wild ride to exhilarating peaks as well as stomach churning lows. This is no way to carry out an investment plan and is one of the main reasons why so many investors don’t even match the average market return. Don’t be that investor. Use your reason to develop a plan and faithfully execute that plan irregardless of what the market does. It’s no easy task to tune out the emotions that question our every move, but I’m convinced that doing so will reward a person for their effort.
So, have you fallen victim to fear or greed in your investing? I would love to hear your story in the comment section.