Chris Ciovacco: Improving Your Perspective On Markets.
We all want:
- To become better investors.
- To improve our ability to probabilistic-ally forecast future market outcomes.
- To reduce daily investment stress.
- To sleep better at night.
If any of the points above apply to our current investment circumstances, it is highly unlikely these issues will be addressed unless we are willing to take an honest inventory of our current approach to the financial markets.
Topic Is Timely
Stocks have been holding up relatively well in recent weeks. However, an inflation report released Wednesday could bring the markets closer to the bearish vigilante scenario outlined on May 7, which highlights the relevance of today’s interrelated topics of ego, bias, and the all-important concept of investment flexibility. From USA Today:
Wholesale prices rose sharply last month, driven up partly by higher prices for meat and other foods. The producer price index, which measures changes in the prices of goods and services that companies buy, increased 0.6% in April, the Labor Department said Wednesday. Although inflation remains low, wholesale prices last month were up 2.1% on an annual basis. That’s the biggest 12-month increase in more than two years and close to the Federal Reserve’s 2% annual inflation rate target.
Standard Issue Ego Is An Investor’s Enemy
Investing successfully is one of the most challenging tasks on the planet. The financial markets are a difficult nut to crack; one that has frustrated even the most gifted doctors, lawyers, economists, and money managers for all of investment history. A major step in the journey to producing more favorable investment results comes when we are able to step outside ourselves and understand how our ego fits into the investment puzzle. From Eclectic Energies:
We don’t feel particularly safe with ourselves, though it may not always be that obvious. We often are protecting ourselves, in one way or another, from some kind of hurt. Psychology calls this self-protection “defense.” We perceive threatening events or feelings as “attacks” that we need to “defend” from. It is the ego’s primary activity. It seems more noticeable by others than by us that this self-protection can be more important than the truth.
The Truth, Investment Success, And Our Egos
When we talk about ego in an investment context, we are talking about the intense human desire for our opinions and stance to be confirmed by the markets and other human beings. In short, we all want to be right. If we are to become more relaxed and better investors, we need to have a healthy and sound understanding of what “being right” means. Experienced investors who got tired of common investment missteps started a process of ongoing improvement by seriously contemplating this question:
What is more important to me: (a) protecting and growing my capital, or (b) protecting my ego?
This passage from Eclectic Energies is the root of many investment missteps:
Self protection can be more important than the truth.
Once we decide that protecting and growing our capital is more important than protecting our ego, it becomes much easier to say to ourselves:
I have been humbled time and time again by the markets. It is time to take a step back and figure out what is really important in terms of improving my odds of investment success.
What Determines The Value Of Our Investments?
If we want to be more successful in the markets, it is logical that we need to understand how markets work. More specifically, if we want to improve our odds of investing in things that “go up”, then it makes sense to understand why some investments go up and some go down. Understanding how asset prices are set is key to understanding the “truth” in the financial markets. If you are a regular reader and are comfortable with how asset prices are set, you may want to skip down to the section titled Stress Reducing Realization or even down to Bias Can Still Be An Issue. For readers new to the fold, the sections that follow are integral to the master topic two-faced investing.
Markets Are The Truth, Not Our Opinions
Before we can talk about personal bias and the value of becoming a two-faced investor, it is important to understand the significance of personal opinions. Some simple math and a few charts can help establish a reference point for our personal views. Technical analysis is the study of charts, but it is more accurate to say:
“Technical analysis is the study of the market’s pricing mechanism.”
If we want our investments to increase in value, it is important to understand how that will be determined in the real world, which has very little to do with our personal opinions or ego. Technical analysis (TA) often gets lumped together with voodoo and palm reading. The power of charts, and why they are used by the vast majority of pension and hedge funds, is they allow us to monitor the mechanism that sets asset prices. If you understand how assets prices are set, then the value of monitoring charts is easy to understand.