Long Term Investing is about Your Behavior

Investing and managing money successfully is all about how you behave. Morgan Housel

Most investors are not as smart as they thought they were a year ago in the midst of a raging bull market and rising stock prices. Fortunately, they’re also not as dumb as they feel today during a market correction, says Morgan Housel, author of “The Psychology of Money”

Investing, specifically successful investing, is, and has always been, the study of how people behave with money. And behavior is hard to teach, even to really smart and educated people. Effectively, success in investing is achieved by being patient and remaining calm through ‘punctuated moments of terror’ and volatility in the market.

You can’t sum up behavior with systems to follow, formulas to memorize or spreadsheet models to follow, according to Housel. Behavior is both inborn and learned, varies by person, is hard to to measure, changes over time, and people are prone to deny its existence, especially when describing themselves.

Actually, the best strategy is to invest as a long-term business owner which isn’t widely practiced on Wall Street or Main Street. It’s one thing to say you care about long-term value and another to actually behave as a long-term business owner. None of this is easy, but it’s never been easy. That’s what makes investing interesting.

The only thing that you can control in investing is your own behavior.

There is the old pilot quip that their jobs flying airplanes are “hours and hours of boredom punctuated by moments of sheer terror.” It’s the same in investing. Your success as an investor will be determined by how you respond to punctuated moments of terror, not the years spent on cruise control.

Managing money and investing isn’t necessarily about what you know; it’s how you behave. But that’s not how finance is typically taught or discussed in business school and at financial institutions. The financial industry talks too much about what to do, and not enough about what happens in your head when you try to do it.

There were 1,428 months between 1900 and 2019. Just over 300 of them were during a recession. So by keeping your cool and staying in the market during just the 22% of the time the economy was in or near a recession would have allowed your investments to compound and to grow significantly.

You must invest in the U.S. stock market every month, rain or shine. It doesn’t matter if economists are screaming about a looming recession or new bear market. You just keep investing. How you behaved as an investor during a few months will have the greatest impact on your lifetime returns.

There is the old pilot quip that their jobs are “hours and hours of boredom punctuated by moments of sheer terror.” It’s the same in investing. Your success as an investor will be determined by how you respond to punctuated moments of terror, not the years spent on cruise control.

For many investors, they are their own worst enemies. Since, the biggest risk to you as an investor is yourself and your own biases, your win mindset, your own misconceptions, your own behaviors, that impact your returns as an investor.

“Investing is not the study of finance. It’s a study of how people behave with money. It’s a really broad, all-encompassing field of how people make decisions around risk and greed and fear and scarcity and opportunity,” says Housel.

You can’t control what the economy is going to do or how the market will react. You can’t control what the Fed is going to do next. The only thing that you can control in investing is your own behavior. Thus, it’s important you realize that the one thing you can control, your behavior, is the thing that makes the biggest difference over time. Your investing behavior is the most fundamental factor in your investing success.

Simply, investing is about how you behave with money. And, it’s the ability to sacrifice spending money in the present with the expectation of making money in the future. Investing is a risk.

“A good definition of an investing genius is the man or woman who can do the average thing when all those around them are going crazy.” Morgan Housel

References:

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