How do we stay focused? Stop investing emotionally? Tune out media static?
We set intentions. While a good starting place, it’s not enough.
We need a feedback loop so we can use our systems to focus on our intentions and goals. We need to start with inputs, run them through a process, review the outputs, and use the feedback to refine the next set of inputs.
Without this, your intentions are scattered, your goals aren’t measured, and your investment strategy gets chaotic.
In the highway version, bad accidents on the roadside and flashing police lights make us slow down and gawk. With investing, it means taking our eyes off a well-defined path to our destination. And what distracts us, exactly?
Headlines and breathless stories that shout, scream, and beg for our attention.
That can include a stock stampede seems too tempting to resist. You watch a company’s share price go up and up and up. Suddenly, your intentions and system of methodical patience don’t seem like good ideas. They’re killing you, so it seems, while others make a killing.
Without intentions and systems, what rushes into the vacuum? Often, it’s FOMO (the “fear of missing out”).
Soon we join the rush to invest in a hot company that’s far from profitable. We buy when the price is at a hype-infused high, despite the fact that our systems thinking signals flash red all the way.
Here’s how smart investors use systems to stay focused on their financial intentions and goals:
Smart investors avoid emotional investing.
Smart investors experience strong emotions around money just like everyone else, but they don’t let them dictate their plans.
The difference lies in how they refuse to let them turn into emotional investing. See if these feelings and irrational motivations sound familiar:
1. Loss aversion.
The idea here is that we lose more satisfaction from a $100 loss than we gain from a $100 windfall.
Daniel Kahneman, author of Thinking, Fast and Slow, suggests that losses can be twice as powerful psychologically as gains.
Suppose a stock’s price falls fast because of panic over a news story—say, a market downturn or a scandal involving the CEO.
Investors too rattled by the drop to stay focused on the company’s business model and financials will sell, and often at the worst time if the stock is hitting a 52-week low.
This happens often with penny stocks, where a fluctuation of just a few cents per share can produce a quick score for market gamblers.
4. Herd mentality.
If everyone else invests in it, why shouldn’t I? Again: this is FOMO.
5. Confirmation bias.
This is when new evidence confirms already existing beliefs.
That company hemorrhaging money just scored another fawning cover story about its sharp-dressed CEO. It may be great PR, but the business part is lacking.
Since you’re a fan you disregard the former, believe the latter, and let that drive your investment decision.
So, what can we do about these pitfalls?
First, mindfulness helps. If we know exactly what to watch for in our own behavior, chances are we can cut it short or avoid it altogether.
Second, we can incorporate into our focused investment system a response that addresses a specific trap where we feel vulnerable. So in response to loss aversion, investors “can avoid frequent price updates.”
This brings us to the media.
Smart investors know breaking news can break an investment strategy.
Do financial headlines have any place in your intentions? In your systems?
Probably not in your intentions, but that can impact decisions you make in your system. If the inputs address serious wrongdoing or the rising fortunes of a sector, you may reconsider some of your holdings. Overreaction to a news flash only creates turbulence and asks for trouble.
Following some form of financial news is a must to stay informed, gain sector insight, or hear from our investing inspirations. However, that’s not at all like compulsive headline checking.
Compulsive headline checking is more like opening your email or checking social media feeds all day long. It’s too much, too fast, too hyped, too alarmist, and sometimes too sketchy; breaking stories change on a dime.
Compare that to how smart investors deal with headlines. They may read them, but it’s not the only (or even main) input they consider.
Several noted billionaires, including Warren Buffett, embrace a buy-and-hold approach. Using this as a cornerstone for his system, Buffett treats alarmist headlines as buying opportunities. He evaluates whether the company’s revenues still pass muster, despite the bad news.
If so, it’s dinner time on Wall Street. “When hamburgers go down in price,” he quipped, “we sing the ‘Hallelujah Chorus’ in the Buffett household.”
When you make the media’s fire hose part of your investment system, the potential number of unproductive reactions is limitless.
Smart investors prioritize focus.
Smart investors stress focus, patience, and a long-term approach.
Whether we invest by emotion, headlines, or leave our investment system off to the side, there is one common denominator: all thinking and intentions go out the window.
Instead of working with reliable inputs, we use faulty ones. Instead of process, we react. Outputs lose all consistency. And the only valuable feedback for the so-called system? “Ugh. Don’t try that again.”
When we prioritize focus, we can avoid the bad habits that test our patience or distract us from our goals. Smart systems help us prioritize, and intentions lead the way.
For example, this long-term system prioritizes focus by taking emotions out of investing:
- An intention sets the framework for focus.
- Focus leads to setting measurable goals.
- A process that involves research and action keeps the focus on reliable inputs, like how analysts rate the investment or simple data such as a stock’s price-to-earnings ratio. Then, digital tools that remove the guesswork keep the investor focused on their strategy.
- The investment decisions guided by logic and data act as outputs.
- Feedback incorporates lessons from mistakes and successes, until…
- Ten years later, the system still works. It’s aligned to the intention, but flexible.
Now, think about the bad financial choices people make and later regret: impulsive purchases, going way over budget, running up credit card debt…
They likely didn’t set intentions. They never said “I intend…” so they didn’t set a goal or build a system to put them on a path towards smarter investing.
Simple statements and a simple process work hand in hand to make your financial life easier. You may run into obstacles and occasionally fight the temptation to get in on the latest trend.
But if you stick with it, you’ll never hit a dead end.