Behavioral Finance

Discover Your Investment EQ

The most common cause of low prices is pessimism It’s optimism that is the enemy of the rational buyer.
- Warren Buffett

Ask a group of investors to share the secret to successful investing, and youre likely to get many different quantitatively focused answers, ranging from, hold for the long-term, diversified asset allocation, quality research to the much touted buy low, sell high mantra.

However, recent research into the human mind has found that the secret to success in any long-term endeavor, whether it be in business, relationships or investing, is an attribute called Emotional Intelligence (otherwise known as EQ). EQ is a type of intelligence thats significantly different to the standard IQ-based definition of smart were all used to. The topic of EQ has received significant coverage in the business world in the last few years, fueled in particular by Daniel Golemans books which are aimed at helping business people use the skill to further their careers and effectiveness.

Following the four facet Goleman model for EQ, the emotionally intelligent investor would, for instance, make investment decisions calmly based on a higher consciousness of who they are and with a positive personal relationship to money (the first facet of self-awareness). This is instead of making decisions based on an emotional impulse which sabotages their financial position. They also handle stress, disappointment and uncertainty more rationally, and dont allow those feelings or circumstances to control or initiate their decisions (the second facet of self management).

Going further, the emotionally intelligent investor would also understand the emotions of others such as their partner, spouse or family members, recognizing them and responding with empathy (the third facet of social awareness). Finally, a person with high Investment EQ would have the ability to maintain quality relationships with others around them when making investment decisions knowing how to, effectively and appropriately motivate them and manage their money energy using subtlety, delicacy and tact (the fourth facet of managing others).

But the role of EQ in investment has been little publicized, even though its application can be invaluable for investors. Whether this is because the investment process is seen as an objective, numbers-based, non-emotional process, or whether the investment industry has simply not been made sufficiently aware of the existence of EQ, is unclear. Certainly, we believe that both a high level of EQ, combined with sound financial knowledge, strategy and advice, can make the difference between great investors and the also-rans. But sound financial knowledge will not do it alone.

So why is understanding Investment EQ so powerful? It is the ability to give a person enough confidence, focus and rationality to remain committed to their strategies even when the market value of their portfolio is declining, not living up to expectations, or being superseded by other strategies. Investors with a high EQ, in the long term, worry less about their investments, reap higher returns, and make fewer mistakes.

Daniel Goleman, with his co-authors Annie McKee and Richard E. Boyatzis wrote in Primal Leadership, Negative emotional surges can be overwhelming; theyre the brains way of making us pay attention to a perceived threat. The result is that these emotions swamp the thinking brains capacity to focus on the task at hand, whether its strategic planning or dealing with news of a drop in market share. For investors, the perceived threat, whether it be sluggish investments or a drop in portfolio value, causes the brain to be overwhelmed with negative emotions. Without EQ, or an awareness and ability to manage these emotions, they can and do cause havoc for individual investors, and on a larger scale, for investment markets generally.

Its a reasonably well-documented fact that chasing last years great performers is a poor investment strategy. However, thats how many players in the investment game, even seasoned investors, have made decisions. How often do you see investors with a strategy then not stick to it? It hurts to see someone else doing better than you are, it hurts to see your portfolio performance lagging behind the investment of the moment. Its not the feeling of hurt per se that causes investment damage, but allowing it, even subconsciously, to determine your next investment move.

Emotionally intelligent investors are like the patient driver, sticking to their lane. This doesnt necessarily mean that theyll put up with a poor investment past its used-by date. However, because they have researched their strategies thoroughly, invested in asset classes they understand, and undertaken the volatility level they know they are comfortable with, these investors are able to operate above the emotional level, sticking to their plans unless there are reasonable and rational arguments to do otherwise. They take time to rationally consider their past successes and mistakes, and analyze possible consequences before making the deal.

However, emotionally unintelligent investors often let fear or panic take control, and are more like the aggressive driver, switching lanes whenever something more profitable comes along. They are often after the quick kill, looking for that one deal that theyre going to be able to talk about for years to come, even if this desire is subconscious. These investors often commit to investments they know little about or are not suited to, and when things dont go as planned, panic and confusion sets in ? the worst possible state of mind in which to be making investment decisions. This is certainly not a deliberate strategy, but when our brain chemistry reacts to danger, it causes us to become emotionally charged ? a fight or flight reaction.

Another dangerous trait of the emotionally unintelligent investor is that theres a high likelihood he or she possesses an inflated ego. Research shows that most investors believe, even subconsciously, that they have an edge on others in the market, that they have better intuition than most players and that their technique, whether it be watching stock indices, predicting the behavior of businesses or CEOs or taking the pulse of the investment community, is inherently better than those techniques employed by others.

Ask most players in the investment game which investor they would most like to emulate, and there are good odds that most of them would answer Warren Buffett. Buffett is a prime example of emotionally intelligent investing. His success, in his own words, is not a result of academic-style intelligence, luck or intuition, but rationality, a key factor of EQ. It was this rationality that keeps Buffett committed to his strategy. During the tech bubble, Buffett was widely criticized for not investing in technology stocks, despite their meteoric rises. His rationale was that he didnt understand them, so he wasnt going to invest in them ? an approach that caused more than one of his critics to label him irrelevant. But even if tech stocks hadnt had their dramatic rise and fall, from an EQ perspective, Buffett still did the right thing ? he stuck to his very rational and logical guns ? guns which he knows intimately.

Discovering Your Financial EQ

The good news is that your Investment EQ can be developed. The starting point is with you learning more about your Financial DNA. The following steps will help you with developing your Investment EQ:

? Using the Financial DNA Core Life Profiles, understand and accept your natural instinctive propensities to risk. This will provide very predictive insights into how much uncertainty you will be willing to bear over the long-term and hence how committed you will be to a long-term strategy particularly, when under pressure.

? Then complete the Financial Directions Profile to understand the influences of your environment, experiences and education on the preferences you have for making investment choices. There will be investment strategies which you will have a greater aptitude towards based on what you have learned, whether they be in the stock market, managed funds, real estate/property or with other investment classes.

? Then analyze the Financial Behavior Analysis which documents your complete Financial DNA. This involves reviewing your level of investment alignment by comparing your natural instinctive propensities based on how you are hard-wired to your learned preferences.

? Another important step will be comparing your Financial DNA to the good and poor financial decisions you have actually made in the past. This will help you pinpoint the investment decisions you will be comfortable in making and to identify areas where greater investment education is required.

? Finally, use this behavioral knowledge of your Financial DNA to help you become personally aligned and become more aware in an overall life sense of what decisions you will be comfortable with. The overall dynamics of your life will impact every investment decision and the lives of others you have relationships with.

For more insight into this topic, please read Hugh Massie’s book:
“Financial DNA – Discovering Your Unique Financial Personality for a Quality Life”.

Being or Doing

I am meeting and communicating with an increasing number of people who are searching for more meaning in their life. Or put another way discovering their life purpose.

To be honest, a lot of what many people are doing is just searching. Life purpose discovery is difficult and in many ways a journey in its own right. However, the process of discovery does become easier if a process is followed and you have a way of thinking about it.

I recently read a great book on life purpose, and by chance today found out that Oprah is currently doing a series on it. The book is “A New Earth – Awakening to Your Life’s Purpose” by Eckhart Tolle.

The concept Tolle puts forward is that you firstly need to find your inner purpose – which in essence is your consciousness. The first step is to become more conscious of who you are and get into a state of Being. To a large degree this is being comfortable who you are at the core and going with the flow. Then once you have reached a higher degree of consciousness and your ego is no longer running your life then it is about finding your outer purpose – the awakened Doing. This is a lot more about what you do based on being awakened through a higher level of consciousness. Ultimately, both the Being and Doing have to be integrated and are closely related, but the Being comes before the Doing. The key point here is that the Doing will change during your life as your environments and passions change, and the core of YOU is your Being.

How do you find your awakened Doing? Tolle says there are 3 modalities: acceptance – what you willingly do now, enjoyment – what you enjoy doing from the aliveness that flows into it, enthusiasm – means there is deep enjoyment plus the added element of a goal or vision that you work toward. In whatever you are doing, you are able to enjoy Being. I really believe this is a great model to help you connect your inner self to your outer world. Much of the Financial DNA approach is centered around behavioral assessment tools to help guide people find where their inner zone is for their life and then once comfortable with that integrate their money and life decisions. Whilst our approach is to some mechanical it does connect you to your energy and help raise your consciousness. Those who are truly able to make committed decisions for their life and finances usually have found their inner zone. What I then see is clearer goals, and less decisions based on emotions and ego.

So, start working on how you can raise your consciousness.

Money Influences Leadership

In recent weeks I have been doing some leadership development consulting and coaching. The goal of this work has been mainly to help the leaders to build their emotional intelligence and then generally their self awareness of what is driving the decisions they are making.

Typically, most leadership development work of this kind focuses on the person’s behaviors, experiences, the influences of the environments they are in and have come from, their skills and knowledge, and even their states of consciousness. All with the goal of helping the leader understand themselves better and becoming more empowered. Then there is also training on specific leadership methodologies and strategies. None of these factors are to be underestimated as being unimportant, because they all are.

However, there is one factor often missing from the discussion — and that is money. The reality is that the topic of money is missing from the coaching agenda full-stop. Why? Talking about money can be a very emotionally charged issue for both the leader and the consultant/coach. Many people are, when it gets down to it, mystified by money and the power of its impact.

The reality is, money is directly or indirectly wrapped up in some way with every decision that a person makes, and is therefore a very powerful influence. Leadership decisions are no different. You only have to look at some of the decisions made by leaders in the last 10 years and see the devastating outcomes resulting in spectacular corporate collapses, insider trading, bankruptcy. Also, the great corporate performances can be attributed to a healthy money attitude.

Yes, money can be the carrot to incentivize performance, but it can also be the driver of warped decisions. Lets not say all of the bad decisions are deliberate because they are not. Some of them are caused by blind spots or put in another way, a simple lack of awareness.

Nevertheless, the point is that your perspective on money, whether conscious or not, influences your leadership – the decisions you make, the goals you set, action plans, how you manage yourself and others and so on.

So, reflect on how your leadership is influenced by money. Perhaps understanding your own relationship to money will improve the quality of your leadership, corporate results, and ultimately your life.

Information Flows Drive Energy

Last night I was called by a family friend (for the sake of the innocent, Amy) who was being pushed by an advisor to make a major decision in regard to transferring her retirement savings account. Why was Amy asking me the question?

Basically, she was feeling uncomfortable and very hesitant. And yet, Amy is normally a very confident decision-maker and is not completely inexperienced with financial matters.

The reason is that Amy’s financial advisor had made the recommendation and given her a huge envelope of documents to work through and absorb. Amy did not even know where to start. The whole thought of this was energy draining. Then the questions of what is the bottom line, what are the risks etc all come up. In essence, her level of trust is diminished.

The issue is not the fact that a proposal has been made. It is all about how the information has been provided. What you need to realize is that this was then negatively affecting Amy’s energy. What will happen? She could just make the decision and regret it later, or simply dismiss the proposal.

So, I gave Amy the very simple, but liberating solution, of asking her advisor to re-frame the proposal and provide in a summary format the benefits and costs of both the new solution and retaining the existing solution. The details can be checked afterwards as needed – which a detailed person will do.

What I am saying is that if you are the client, ask your advisor to communicate on your terms and then it will be easier to make a decision with comfort. If you are the advisor, build trust with your clients by asking them how they want the information provided. You may find that you will have a much happier and ultimately profitable client.

When people hesitate it is very often simply the way they have been communicated with. The information flows drive your energy to make good or bad decisions.

Balancing Life Return and Financial Return

The other day, I was having a philosophical discussion with one of our Wealth Mentors about the role of advisors in the life of a client. “Around the traps”, very often wisdom is brought up, or providing peace of mind, and of course, managing the performance of investments and overall financial stewardship.

None of these are incorrect and they are no doubt part of it. In recent times, I have pinpointed helping clients find “BALANCE” as being extremely important. That is balance between life and money. After all, life and financial decisions are completely integrated. Many financial decisions are a reflection of your life and behavior. Key to finding balance is helping the client objectively understand their inherent strengths and struggles based on who they uniquely are, and then their preferences. So, the balance will be different depending on our different behavioral styles.

Everyone has to be accountable, including the financial advisor. So if we take BALANCE as the platform, then how should the advisor be measured by the client. To a large degree, the advisor is responsible for communicating the right message – which comes down to understanding his or her own role. So perhaps the messaging needs to be more of the flavor: “If I help you discover what you want and help you get it – does it matter what financial return you get?” This is not saying financial return is unimportant, just not the only priority.

Further, as a life issue think about the fact that alot of money does not necessarily provide freedom, and too little does not either. Depending on who you are there is a comfortable balance. The role of the advisor is to help you find yours and keep you on that path.

What Are You Passionate About?

In recent weeks, I have had so many conversations with people where passion has come up in various ways. So, I thought it would be good to put some more energy into it by commenting on it in my blog. I even did a very interesting interview with one of our Wealth Mentor’s last week on how he had found his passion and what it has meant to his life over the past few years.

My approach in working with client’s has been to fairly early on in the conversation ask them: What are you passionate about? I have found this to be a very powerful question in finding out where their life is at and where they want to go. This is so important if you are helping someone set their goals and direction. I do not really believe you can do financial planning for a person without knowing their passion because it is so fundamental to their life. Having clarity of your passions regardless of what they are means you can make decisions with confidence and commitment. 

When you think about it, this question is very important regardless of what role you are playing in the person’s life. If you are a business consultant of any sort it is important. Or even if you are just a friend, coach or in some way have an interest in the person’s life the question will really open up a great discussion. 

Discussing passion will really help you get below the surface and connect with the person. You will build a fantastic bond and it is likely the memorability factor will be high. You may even change the person’s life because they will be liberated to reveal something that is core to their life which they had not been fully conscious of. This happened to me, and it set me on the path I am on now. 

So, think about bringing this question into every conversation. It may also bring you closer to your own passions.