How to think as an investor

Most investors could do better if they acted more like historians and psychologists and less like meteorologists. Meteorologists try to …

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Most investors could do better if they acted more like historians and psychologists and less like meteorologists.

Meteorologists try to forecast exactly what’s going to happen next, particularly over the short run. Weather predictions are technical, precise, and always changing.

Historians and psychologists look for broad trends of what people tend to do over time.

What do people like?

How do they behave?

How are they flawed?

How can you overcome those flaws?

How do all those things apply to you?

What matters most over time as an investor are not the short-term technical details. It’s mastering the long-term behaviours that define how people think about risk, greed, fear, and opportunity that separates the successful from the frustrated.

Finance is overwhelmingly taught as a math-based field, where you put data into a formula and the formula tells you what to do, and it’s assumed that you’ll just do it.

This is true in personal finance, where you’re told to have a six-month emergency fund and save 10% of your salary.

It’s true in investing, where we know the exact historical correlations between interest rates and valuations.

And it’s true in corporate finance, where CFOs can measure the precise cost of capital.

It’s not that any of these things are bad or wrong. It’s that knowing what to do tells you nothing about what happens in your head when you try to do it.

Think more broadly, less technically.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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