How Stoicism Can Make You a Better Investor

“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 ancient 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 total 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 did 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.

5 thoughts on “How Stoicism Can Make You a Better Investor

  1. Hmmmmm tough one. I like charts and graphs though I have no clue on how to make them (limited excel skills) When it comes to decision making I operate from my intuition. I find it extremely hard to step outside of that. Being an INFJ (Meyers-Briggs) I follow my gut because it usually-always points me in the right direction. I realize that when it comes to investing I’m going to have to learn to do research because I can’t operate the way I have in my personal finance journey so far; getting out of debt, saving, setting up my RSP and beginning to prepay my mortgage have all been decisions I made because I felt I must, I had to, it just so happens that the math made sense too.

    • Ahhh… the Meyers-Briggs test. I’m an INTJ. We speak a very similar language :-)

      I think when it comes to investing it takes a blend of analysis. It’s not just the quantitative, but the qualitative component as well that needs to be considered. Finding a balance between the two is a must. I only have a year of investing under my belt so I’m still learning the ropes myself.
      Thanks for stopping by!

  2. Hi,
    I’ve been a stoic all my life but didn’t realize it until later in life when I discovered stoicism was an age old philosophy. I’ve also been an investor all my adult life starting in 1983. Only recently, have I actually thought about a way to blend stoicism with investing and making the alignment an actual investing framework with practical application. I ran into your blog here and see you are doing the same thing. Seems we are in like-minds.

    I too am a dividend investor although I have a different approach towards stock picking and strategy. As for stock picking, I limit myself to only stocks that have dividends but don’t care about their yields, growth, payout ratios, moats, or any form of value metric (Sorry Mr. Buffet, I am just too cynical about how corporations post earnings and other fundamental information posted for general public consumption).

    By the way, as a side issue, I only buy stocks when the market is going up, defined by me as the 50 day moving average is above the 200 day moving average and the SPY price is above the 200 day moving average, If the general stock market is not going up, then I simply find an asset that is going up and buy that. If nothing is going up, I simply short the market or hold cash. Sorry to deviate a bit, but I need to put this post in a context.

    Also, Simplicity, is my guiding value but as Einstein said “Make things simple but not too simple” or something like that. So, using simplicity as my guidepost, I only use three “objective” questions when I choose a stock:

    1) Does the stock have a dividend?
    2) Does the stock have an average 90 volume above 50,000 shares traded per day (liquidity issue).
    3) Is the stock price moving up as fast or faster than the market and its sector over the last 6 to 12 months (relative strength)?

    If the answer to these two questions are “yes”, then I want some sort of confirmation or outside opinion that I am not too far off base. I use the simplest opinion possible, and that is the ranking for the stock. This ranking is based on a 1 to 10 grade using four categories; fundamentals, technicals, ownership, and value. I choose only stocks that have a grade of 8 or better.

    Again, I don’t put a lot of faith in these fundamental numbers, but I use the MSN site just to confirm that I am not buying “junk” or a stock that is in distress. The ranking keeps me in check and acts as a confirmation.

    From this list I might have 20 to 50 stocks to choose from.

    Lastly, and this is where the stock picking part of my strategy gets very subjective. I look at the charts of many time frames from 5 years to 3 months and I pick the charts that have very “clean price prints”, very linear, not much volatility, very easy to enter and exit. And the question I ask myself as I look at the chart is this:

    Do I want to own this chart?

    I don’t think in terms of owning the company, I think in terms of owning the chart. Weird I know, but I take the emotion out of the thought of buying a “company” and instead, I think about buying the “chart.” I look at the chart and treat it as a picture or as art. Is the chart beautiful? Is it symetric. Does it make sense? Do I love the chart?

    In this fashion, my emotion is in check. I no longer see the stock as a company with earnings, law suits, products, services, market…I simply see the stock as picture. Doing this gives me the mental framework of detachment and being disinterested, a very stoic value.

    Of course, I have a selling plan in place as well but I will leave that for another post.

    Thanks for reading and I appreciate any comments.

    • Jake,

      Thank you for stopping by and leaving such an in-depth comment. I’m fascinated to hear more about how you have combined Stoicism with investing. Your approach to investing seems to be from a technical approach. It is not the style I use, but I hope you stop by in the future and further share your approach with the readers as well as myself. I’m always interested in different approaches to investing.


  3. You rally got something to say. Thank you for sharing your thoughts. Regarding investment-approaches, I extremely liked a word Motley-fool gave to me: “When someone talks about charts: Walk away”.

    To apply stoicism to investing took me a while. Once I thought my depot was pretty much build up. That was in june 2011 – afterwards I soon learned the hard way to live with volatility. The thinking of that time made me a dividend-investor.

    One good thing I learned from the first day of my military career was “acting into uncertainty”. At the end of the day it comes down to press or not to press the button “buy”.

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