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John Engle
John Engle
Articles (529) 

Investors Are Often Their Own Worst Enemies

The path to victory in the stock market starts with the battle for self-control

June 17, 2019

Investing is not merely a matter of rational assessment of opportunities. There is also a psychological component. Indeed, the psychological aspect often overwhelms the rational side, as Benjamin Graham, the father of value investing, pointed out:

“The investor’s chief problem—and even his worst enemy—is likely to be himself.”

Psychological bias and emotional response to market action are often the bane of sane, clear-headed investment decision-making. But while everyone may be susceptible to these influences, there are ways of overcoming our worst impulses. Dr. Brett Steenbarger, a psychologist and trader, has done some very interesting work on the impact emotions can have on trading and investing decisions. He has also developed some intriguing techniques for controlling them that many investors might find useful.

When feeling warps thinking

In his writings, including the book "The Psychology of Trading," Steebarger has worked to identify the emotional stresses that can warp decision-making. These stresses can prove extremely dangerous, financially speaking, if not recognized and brought under control. One such danger occurs when investors cease responding to changing facts in favor of becoming “locked in” to a thesis:

“Getting locked into a view is a classic case of ego-based trading, where being ‘right’ becomes more important than following the market.”

Thesis creep is a well-known phenomenon. When trades or positions go the wrong way, investors will often try to validate their positions to themselves with new justifications, rather than acknowledge the changing reality. As a consequence, they often end up losing far more. It is better to recognize a mistake and respond accordingly.

An overactive ego can lead to self-deception, which is a recipe for disaster. This can be exacerbated further when investors allow themselves to overextend individual positions, as Steenbarger has discussed:

“If we strongly expect a trade to work out - and, even more, if we need it to work out - we set ourselves up for frustration when our scenario doesn't play out.”

Any oversized position can be dangerous to an investor. If a position going south could have an existential impact on an investor’s financial wellbeing, then it is fatally dangerous and unwise to take. Yet, it is something investors frequently do, allowing themselves to be sucked in - often in small increments - before recognizing the scale of the danger.

The risk is more than size in this situation, however. It is also a psychological risk: When an investment position becomes overwhelmingly important, it becomes harder to think rationally about it. This can magnify the impact of emotional decision-making.

Overcoming feeling to allow clearer thinking

Steenbarger does more than identify the ways our emotions can sometimes overcome our rational faculties. He also recommends some techniques for overcoming them, including meditation and visualization exercises, which he has found can overcome the warping effects of psychological stress:

“In these techniques, we learn to recognize the signs of frustration as they are occurring (angry thoughts, physiological arousal, pounding the table, etc.). We then pull back from the frustrating situation and perform exercises that calm us and require us to sustain focus. For example, in meditation we might slow and deepen our breathing, keeping it quite regular, while we maintain focus on a peaceful image.”

These techniques may sound a little too “new age” for some battle-scarred investors and traders, but there are other, more grounded methods they might employ. Managing position sizes with great rigor so that no investment ever “needs” to work out is one. This requires discipline, and may be reinforced with the implementation of fixed rules.

Such rules can create a degree of serenity insofar as the decisions you make will never end up having the overtones of a life or death struggle. This removes the potential for punishing psychological stresses emerging in the first place.


However one chooses to do it, investors must recognize their own natural biases and psychological proclivities - and develop tools for overcoming them. Serenity is always the goal, but it can be hard. Finding the right rechnique may take time, but it is undoubtedly worth the effort.

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About the author:

John Engle
John Engle is president of Almington Capital Merchant Bankers and chief investment officer of the Cannabis Capital Group. John specializes in value and special situation strategies. He holds a bachelor's degree in economics from Trinity College Dublin, a diploma in finance from the London School of Economics and an MBA from the University of Oxford.

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