Monday, October 19, 2015

The Third Emotion of Investing

It's often said that financial markets are driven by two competing emotions, greed and fear. Skilled investors attempt to control these emotions, and to capitalize on the failure of other investors in that regard. Warren Buffett has repeatedly said that while he focuses on fundamental value, his behaviour is dictated by a simple dictum: "Be fearful when others are greedy, and be greedy when others are fearful."

There's a third emotion that requires constant management: boredom. 

It's exciting when assets go up or down by a lot. Generally, they don't. It's boring to watch things that don't do much in a hurry. And it's boring to wait for the market to validate your assessment of fundamental value. 

It's boring to sift through financial statements or filings and then discover a company is fairly valued. It's boring to wait for a better opportunity to purchase an asset. It's boring to own a company that has excellent prospects but that no-one has ever heard of (or is likely to ever hear of). It's boring to remain invested in a company that is quietly compounding its value (and whose business you understand well), when new opportunities appear more alluring. It's boring to invest the same way you always have, when the world around is full of "sophisticated" investors raising a lot of money for complex strategies. 

Sitting through long periods of boredom is a prerequisite for the fundamental investor. Dealing with this boredom is every bit as important as avoiding being swept away when valuations are high, or being decisive when it seems like businesses, economies or financial markets will never improve. 

Pascal said, "All men's miseries derive from not being able to sit in a quiet room alone." I doubt he had investment portfolios in mind, but subduing the third emotion of investing goes a long way to preventing misery of the financial variety.

12 comments:

  1. Very rightly said. Apart from 'greed and fear', the third one is 'boredom'. In fact, my many friends trade in stock market only because they can't sit quiet and they have the impulse to do some thing and that 'do something' is invariably stock market. More often that not, many of them lose money also. And therefore 'boredom' is actually a pre-requisite to succeed in stock market.

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  2. A very nice post.
    Just to remember some of the legends famous quotes:
    "Good Investing is Boring" - George Soros
    "Investing should be more like watching paint dry or watching grass grow." - Paul Samuelson

    I guess the ideal way to beat boredom should be to read books, annual reports or getting insights about each industry. Rather than exciting happenings they show on TV or watching stock quotes.

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    1. Thanks Hemanth. I'm planning another post on how to beat the boredom.

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  3. Fantastic post Ravi. I love reading your blog.

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    1. It's a real pleasure to hear that from you, Sanjay, and the feeling is certainly mutual.

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  4. Excellent post!! I always say to my friends "More often you see your portfolio, more often you have to react to it". See it infrequently and see if your theory buying a stock was right.

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  5. Well, you have the answer in the the article itself.
    it is articles like these that reduces the boredom.
    investment is supposed to be as boring as watching the paint dry, true.
    but the key thing to note is that you still need to keep watching!
    thanks for a nice article

    Thanks
    Raghav

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  6. Very nice post indeed. 'Boredom' is surely the key to success in Long Term Wealth Creation. Thanks Ravi

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