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🦉 Trusting your instincts: a quick way to lose money
and what you can do about it
Al Atencio
September 10, 2024 • Estimated Reading Time: 10 minutes
Your gut and intelligence are lying to you—and it’s gonna cost you a lot of money.
Think your instincts and smarts are enough to conquer investing in the markets? Think again.
Some of the brightest minds in history have lost fortunes, all because they trusted their intuition in the unpredictable world of investing.
So why do so many smart people get investing completely backwards?
Let me tell you about the counterintuitive nature of the stock market.
And more importantly, how you can succeed where others fail. No matter where you are in your wealth creation journey.
tailor made for failure
My father had an unusual nighttime habit.
He would wake up in the middle of the night like clockwork.
Making the best out of the inconvenience, he would stretch out on a big red Chesterfield sofa in the study and read for about an hour until he could fall asleep again.
I wondered then why some people slept just fine and he couldn't.
Then I stumbled upon an article explaining that our ancestors had very different sleep schedules throughout most of human history.
Our modern 8-hour block of sleep was adopted in the industrial era, to fit factory work shifts. Before this, people had two or even multiple sleep periods.
And some of these patterns continue today among people who spontaneously wake in the middle of the night, "a persistent echo of a pattern of sleep ... dominant for literally thousands of years."
Suddenly, my dad's sleepless nights made sense.
It was my first glimpse of how we are not properly wired for our current environment. Mind blown!
And it turns out there are many aspects of our modern world, like investing, where we are actually wired for failure.
Financial markets are relatively new.
Booms and busts have been common since the start—like the infamous South Sea Bubble of 1720, where Sir Isaac Newton lost most of his wealth.
Stock chart which looks just like that of a dotcom bubble stock.
But until recently participation in financial markets was virtually nonexistent for most.
Looking at the chart below, in the U.S. it wasn’t until the 1980s that more than 30% of the population became stockholders (forget emerging markets), largely due to the introduction of the first 401(k) retirement plan in 1978.
Many have heard stories about Warren Buffett or someone who struck it rich with bold investments.
Or know of the fearless Wall Street titans who make a killing in the markets.
It's tempting to think we can copy their success, but without much understanding of what's involved, it's like walking through a minefield blindfolded.
It doesn’t help that scrolling through social media, we see people parading how they are making tons of money.
And you’re asking yourself why can’t I make some quick money as well.
But how many of those stories are about luck rather than skill?
I don't know anybody who as a young investor went all-in stock picking, options trading, shorting, and didn't blow up.
Including myself.
I bought falling knives, sold my winners too early, bought hot stocks at the top, panic sold during some crashes, paid attention to financial news and guru forecasts.
We can't help but swing for the fences when we're bullish—and going to cash when we're bearish.
Buy high and sell low. Rinse and repeat until broke, as the saying goes.
Again.
And again.
Why?
Because we just can’t help ourselves!
Fundamentally, our behavioral wiring is not naturally suited to this task.
The funny thing is that this realization has been around for a while:
“I can predict the movement of heavenly bodies, but not the madness of crowds.”
“The stock market is never obvious. It is designed to fool most of the people, most of the time.”
“I have encountered colleagues, “rational,” no-nonsense people, who do not understand why I cherish poetry or obscure (and often impenetrable) writers… Yet they get sucked into listening to the “analyses” of a television “guru,” or into buying the stock of a company they know absolutely nothing about, based on tips by neighbors who drive expensive cars.”
emotional finance
People who have $100,000 want to reach $1 million, and know those with $1 million are thinking of getting to $10 million, and so on.
The desire to grow wealth usually leads to impulsive and risky behavior. Especially the more we are in those first steps of wealth creation.
This compels us to take bolder bets - relying more on luck than skill.
It’s no surprise that lottery participation is highest among lower-income groups, as they gamble on pure chance. Gambling and luck are the opposite of skill.
We all want to make millions in a few years not twenty, I get it. However, in publicly traded financial markets, that mindset simply does not work.
I keep a post-it on my desk with another favorite quote to remind me of that fact:
“Urgency does not call for changing methods that work, for methods that do not work”
Let’s channel Charlie Munger and invert: What methods have repeatedly proven ineffective?
Going all-in the latest FOMO craze
Day trading and options trading
Buying sophisticated and expensive financial products
Attempting to time the market
Panicking selling during a crash
As one of my investment heroes says:
Successful investing is much less about financial acumen and much more about emotional control…
The Four Horsemen of the Investment Apocalypse are fear, greed, hope and ignorance. Only ignorance is not an emotion.
We always try to solve for the highest possible return when considering investing success.
Let me tell you a secret:
That’s why we are always being pitched fancy, new or can’t fail investment products. By banks, funds, advisors… Like candy for children.
Because they know that’s what we instinctually crave.
We rarely solve for a way to deal with our human nature and emotions.
So, let’s talk about how we sidestep human emotion.
young investor takeaways
process and plan over emotion
Don’t let human emotions dictate investment decisions
Don’t react continuously to market events
Don’t focus on forecasting the economy, timing the markets or finding the manager who can beat the markets (because nobody can consistently!)
So, how do you growth wealth in financial markets? A non-emotional approach that relies on:
Setting clear, long-term objectives (e.g., how much money do I need to buy a house or retire?)
Developing a comprehensive investment plan to meet those objectives
Not trying to beat the market as the primary objective, and relying more on proven low-cost passive index funds
The hardest part? Consistently executing on that plan.
Left to our own devices most of will not be successful, so:
Surround yourself with reliable information sources
Educate yourself, follow the right people 🦉 or hire a financial advisor
Tune out short-term market noise and guru forecasts
equities: the numbers don't lie
Consider these compelling statistics of equity returns. Since 1926, rolling 20-year investment annual returns for the S&P500 were:
7% or higher over 90% of the time
8% or more in 75% of all rolling 20-year periods
10% or higher occurred 56% of the time over 20-year spans
$100,000 invested in the S&P 500 twenty years ago would be worth $735,000 today (with dividends reinvested). If on top of that you also saved $1,000 a month and invested it in the S&P 500, it would total $1,462,000 today.
That’s why the S&P500 is a core holding for so many investment portfolios.
TAKE ACTION
Embrace a process-driven approach and surround yourself with the elements to stick to that plan.
It looks easy, but it’s incredibly hard.
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