Long-term investing is the most rewarding way to achieve superior, durable returns from the stock market. But it requires a long-term mindset to succeed at it.
Self-awareness is the foremost element of a long-term mindset. It is the ability to truly understand ourselves – the ability to know how we think, feel, and behave in different situations. Since, our area of concern is investing, ‘self-awareness’ enables us to know how we think, feel, and behave when it comes to investing.
Why ‘Self Awareness’ matters
In investing or any other activity that involves decision-making, we arrive at our judgements, either impulsively or rationally. An impulse-driven judgement will be largely erroneous, and decisions or actions based on such judgements mostly result in negative outcomes. On the other hand, a rational judgement, which is arrived at through a deliberate contemplation of relevant facts, has a high probable chance of delivering positive outcomes. Almost every research on ‘judgement’ and ‘decision-making’ advises a ‘rational judgement’ route for optimal results.
However, this is easier said than done, because our ‘emotional’ brain – the part of the brain responsible for our emotions and the resultant impulsive decisions – is almost twice as powerful as our ‘rational brain’ – the part of the brain that can reason and deliberate. When we are asked about our approach to investing, most of us will answer that “we invest rationally.” But in real time, we largely act impulsively after getting befuddled by our overwhelming emotions.
Whether we like it or not, much evidence-based research shows that most of us have a highly elevated opinion about ourselves. We are overconfident in our skills. Unfortunately, our elevated opinions and overconfidence can lead us to make poor decisions. In investing, poor decisions mean losing money; in some worse cases, the loss can even be higher than your invested capital and can get you into debt. Hence, it is essential to determine our investing temperament – how we are wired naturally – before getting on with the task.
Self-awareness is, thus, all about estimating the gap between ‘who we think we are’ and ‘who we really are’; and then taking the necessary steps to reduce that gap as much as possible. It enables us to accurately determine which part of our brain dominates when it comes to investing or general money matters – the ‘impulsive’ brain or the ‘rational’ brain.
Fortunately, you don’t need to be distraught if you realise that you lack the necessary temperament for investing, because many recent studies show that: our brain is malleable. This means that even if we lack the natural skill for something, it is possible to develop those skills through instructive and deliberate actions.
Pattern Recognition
The first step towards self-awareness is to observe and sketch our patterns – how we think, feel, and behave – while analysing stocks, arriving at investment decisions, and finally executing the decision. The chances for missteps along the way are many. We might analyse stocks rationally but arrive at an investment decision impulsively. We might analyse and decide rationally, but rather than executing the rational decision, when the time comes to act, we do so impulsively.
Once we have an accurate sketch of our patterns, the following three methods can help us become more self-aware: 1) belief adjustment; 2) learning mentality; and 3) seeking feedback. These methods are most constructive when they are practised holistically.
Belief Adjustment
The beliefs we hold about ourselves are just assumptions that are largely unrooted from reality. They are vastly based on ignorance, biases, and stereotypes and therefore inaccurate. They are either formed from the inside of us or imposed on us from the outside but without the necessary vetting. However, the most preposterous aspect of our belief system is that, despite several evidences of personal behaviour and performance that are widely divergent from our beliefs, we still prefer to hold onto the wrong beliefs and live in self-delusion. This could be because it is hard and painful to accept the truth that we are not as intelligent and skilled as we think. So normally, since being the path of least resistance, we choose ‘self-delusion’ over ‘self-awareness’.
However, we can trigger the progress from self-delusion to self-awareness if we are willing to place something – a goal, a cause, a relationship, or family – above ourselves. Investing and building wealth is a worthwhile goal to pursue. It is not about gaining wealth and indulging in pleasure or luxury. Rather it is about gaining wealth and improving the quality of your life and that of your loved ones. Your wealth determines whether your child grows up in a safe and virtuous society; it determines whether they get a quality education or not; it can also enable you to do ‘what you want to do’ rather than ‘what you have to do.’ It makes our lives more meaningful and purposeful. Under such conditions, we have a greater willingness to challenge our assumptions and gain a more realistic perspective on ourselves: we become more self-aware.
Learning Mentality
When faced with choices we always select the choice with the least resistance. It is human nature, but also a tendency we need to resist and overcome. If the choice is ‘learning’ or ‘proving’, we choose ‘proving’ because it is the path of least resistance. ‘Learning’ means knowing more about ourselves while ‘proving’ is more about projecting a pretty image (but not real) of ourselves to others. It is easier to ‘project success’ than to be successful. It is easy to ‘project a happy life’ rather than being truly happy. The same goes for wealth: ‘projecting wealth’ and ‘being wealthy’ are two very different things.
However, if self-awareness is your goal, ‘proving’ will get you nowhere, only ‘learning’ will help; that is, knowing more about yourself from your real-world performance and interactions. To become more self-aware, we must abandon the ‘proving’ mentality and embrace a ‘learning’ mentality.
Seeking Feedback
‘Self-awareness’ can also be gained through quality feedback. These are feedback from reliable, trustworthy, and divergent sources. There will be both positive and critical feedback. Both should be taken in the right spirit. The feedback needs to be aggregated and evaluated with an open mind. Finally, the insights gained through the evaluation should be used to make constructive changes to our patterns – how we feel, think, and behave.
Conclusion
Self-awareness can make us, not just a better investor, but also a better person. It helps us accurately identify which part of our brain – rational or impulsive – dominates when it comes to investing and other money matters. Self-awareness is a skill and like any skill can be cultivated through instructive and deliberate effort. Because of the malleability of our brain, anyone can become proficient in this skill, through belief adjustment, learning, and feedback.
Your investing temperament is how you act when it comes to matters of money and investment. Which part of your brain dominates then – rational or impulsive? Once you have identified that using your self-awareness skill, what next?
The next step is restraining your ‘impulsive’ brain and activating your ‘rational’ brain so that you make better judgments and choices that serve you well. How do you do that? Through ‘Self-Control’. We will discuss ‘self-control’, its importance, and methods to exercise it in a later article.
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