Investors need to be more Spock, less caveman

Cameron Watson

Training and development manager at Craigs Investment Partners
www.craigsip.com
“May I say that I have not thoroughly enjoyed serving with humans? I find their illogic and foolish emotions a constant irritant.”  – Spock, 1968
Our ‘fight or flight’ caveman instincts are not helpful when it comes to investing. We need to be cool, calm and rational, like Spock.
The problem humans have when investing is that the ancient part of our brains, the limbic system, was used by our cave-dwelling forebears to weigh up simple but important decisions such as; should I take on this sabre-tooth tiger with my spear, or bolt for that tree?
The problem for investors is we still have this limbic system in our brains and it can make us act instinctively rather than rationally, and is not helpful when it comes to complex, long term decisions like investing. It can prompt some flawed decision making such as:
We trust intuition over reasoning. Check out this test James Montier included in his book ‘Little Book of Behavioural Investing’. A bat and a ball together cost $1.10. The bat costs a dollar
more than the ball. How much does the ball cost? (The answer  is below). Ten cents virtually bounds off the page at you,  revealing how we jump to conclusions when we should analyse and consider outcomes. That’s where process is so important  for investors.
Overconfidence – we believe we can control the uncontrollable. When investing, no human can predict how investment markets will perform in future, but they waste countless hours trying to do so when the time would be better spent on improving the aspects they can control, such as diversification.
We are easily influenced by crowds. In my experience, there  is nothing more common in investing than jumping on bandwagons. People continuously follow returns, usually buying at the peak of a market, and then selling at the bottom, rather  than shunning that sort of wealth-destroying behaviour in favour  of long term diversification.
We like excitement, but investing should inherently be boring. Successful investing is centred on diversification, invest for growing cash flows, taking a long term view, buying quality investments and letting compound returns work their magic over for the long term.
But we can overcome our caveman biases and the best way of doing that is to have a clear process for investing; the sort of rational, rules-based approach that Spock would use Answer to Montier’s test: Bat cost $1.05 and ball costs $0.05.
 
Cam Watson is the Training and Development Manager at Craigs Investment Partners. His disclosure statement is available free  of charge on request. This is general information only.  
Visit www.craigsip.com for more information.