Improving Investor Behavior: The Positive Mindset of Investors
Pessimism is poison for investors. Following national headlines would have you
believe we are moments away from catastrophe, teetering on the edge of sheer doom. It’s an easy narrative in which to engage, especially when we hear it every minute of every day. The problem is that repetition often convinces people, and once convinced, people tend to ignore logic. That is poisonous for investors.
If you’ve been following this column, you understand just how damaging emotions can be when it comes to investing. Emotions cloud judgment, muddy decision making, and create stressful situations. Now I’m not going to tell you everything in our world is great, but the reality is things are pretty good. Our world is arguably better than it has ever been.
When you think about it, being an investor requires a positive mindset. It necessitates the belief that the future will be better. After all, the reason you are willing to take some of your hard earned cash and invest it in something means you are optimistic about the future prospects of that something. Combine this belief with the patience required to be a long-term investor, and the investment tends to pay off. Actually, on a long enough time horizon, it has always paid off. The market is far higher today than it was 20, 50, or 100 years ago.
Over long time periods, things are unquestionably getting better. According to Our World in Data, across six significant areas of health and social progress, our world has improved by leaps and bounds. As a society, we are healthier, wealthier, and smarter than we have ever been. So what’s up with all the negativity?
Ask yourself this: how has literacy changed over the past day? Week? Month? Frankly the “good” in society is much more difficult to measure over a short time than the “bad.” When bad things happen, they usually unfold pretty quickly. This makes them newsworthy, which is how they end up in your ear, day in and day out. This constant negativity makes it easy to extrapolate and assume, which are two more behaviors we are continually fighting.
As a result of these negative stories we extrapolate, “All I hear is bad news, the world must be falling apart.” But extrapolation without data is an assumption, and assumptions are often false.
The book, Factfulness by Hans Rosling, is an excellent read on how a negative bias creates instincts that shade our viewpoint. This, in turn, causes us to develop beliefs in our minds that defy historical facts, which in turn cause us to behave in ways that are not necessarily good for our future.
This disposition hits people hard, both in their portfolios and mental wellbeing. Pick a poll, and the conclusion is the same: despite progress in so many areas, people in America are generally “less happy” than they have been. I’m not sure how we go about improving happiness or changing people’s interpretation of negative news, but it is essential to recognize the effects this may have on your decision making and therefore your finances.
The best thing investors can do is look at the future in a balanced, positive viewpoint. Having an optimistic view is the only realism. It is the only worldview that squares with the historical record. All you need to do is look around and consider how much better we are today, even though nostalgia is one heck of a drug. And yes, things will continue to get better – that is what happens when you have free markets, incentives to create value and success for others. It is a pretty remarkable system.
Understand that focusing on your portfolio is not necessarily healthy for investors. There will always be something wrong with a company on any given day. Every crisis can create opportunity. The current “Trade War pullback” has people selling stock based on the news of the day. Instead, consider that the pullback creates opportunities to buy great companies at lower prices. Who doesn’t like that? Take the long view and improve your investor results. This is how companies manage their businesses. They don’t make daily changes in their direction, their initiatives, or their products. Why should you? Financial providers make activity or transactions far too easy, allowing you to jump in and out of investments, transforming people from being investors to speculators.
Turn off the noise. Headlines sensationalize nearly everything, even the weather. What happens moment by moment every day is more random than real. The media must continuously provide a narrative to explain the randomness. The noise then reprograms you from being an investor to a short-term speculator. You are motivated to react which often means advertisers win and you lose.
Being persistently optimistic about the future keeps you invested and rewarded. As investors, that’s what we are after.