Taking the Emotions Out of Investing

As a financial advisors, we can almost always tell you ways to make a lot of money. Sometimes, double, triple and even quadruple it. To us, that part is easy.

Let’s take China for example: Loren knew 20 years ago that a lot of money could and would be made in China. At the time, people far away from the reality of what was going on there succumbed to their own fears, emotions and risk tolerances about investing there. People base their perceptions of the risk of an investment often times on their past experiences. China was militaristic, backwards, mysterious, and, most of all, frightening. In large part “the fear of China” was usually left unsaid or only mentioned as an afterthought. Only with much soul searching and prodding could this most telling of primitive emotions be acknowledged. Now, China has proved to be one of the best investments over the past two decades. During that time you would have seen your money more than quadruple.

The same people who would never consider investing in China, might instead take a perceived “safer” route and instead insist on investing in real estate. It did not matter that prices had climbed rapidly or that lenders were loaning money to anyone who could fog a mirror. It did not matter that projected cash flow from rents would not carry a property for years to come. The tendency to frame a historical context (a comfort level with the perceived lower risk) is part of the mind trap most individual investors have within them. Point is, there has been plenty of risk here too, but, unlike investing in China, people felt they can handle the risk. Afterall, real estate isn’t that risky is it?

Now, let’s talk about Gold. Gold is a current example of such psychology. It is increasing in price because of fear (and in many cases greed to make a quick buck.) There is no rational use for gold as a replacement for any other items. Given the choice between a gold coin and an apple, we honestly would take the apple. But, at this moment, it’s obvious that other people don’t see it our way. Truth be told, the business aspect of gold makes no sense—it is not a necessary part of any required products or services. Ultimately, investing in gold is gambling. The same is true for any type of investing that does not take into account the very nature of economic building blocks: a viable business and business plan. What Loren saw in China was development, growth, expansion, modernization, and opportunity—a business plan. What we saw with real estate is nearly the same as what I think about gold right now—numbers did not matter; only that everyone else was doing it to make money. Remember the day traders from the late 1990’s that quit their jobs to trade markets for profit. They forgot about the risk and their lack of a business model and plan. We don’t think we need to explain to you their inevitable outcome.

Stepping back from our own emotional and intellectual tendencies is the only way to make money. And so, where and how do you make a lot of money. Well, if you are client, you either already know where we think that is, and, if you do not or are not a client, it is probably time to ask. Bottomline (pun intended), sometimes the perceived safest place to get a return on our investments are the places that our emotions fear taking us. And, sometimes, where our emotions want to take us, you should fear. Emotional investing is never a good thing, but sound, strategic, non-emotionally driven investing often does return, and sometimes it returns big. Our major and primary job as a financial advisor is taking the emotions out of your investing.