Investing in Difficult Times # 1

By Coen Welsch – The current economic situation in Namibia is putting pressure on everyone. This reminded me of a presentation I did on investments a few years ago. My brief for this presentation was to focus on the psychology of investing. I started that presentation by defining psychology and defining investing, but I’ll spare you that. Here is what I found when I researched this topic.

The first shocking fact I found was that something exists called a “Behaviour Gap”. This concept is explored in the book of the same name by Carl Richard. The idea here says that (under ideal circumstances) your investment has a certain potential value that could be reached if you did everything right. However the reality is that most of us end up with much less than that value because we make silly decisions because of fear and greed and a whole host of other emotions.

The gap between what the potential of our investment could be and the actual amount we end up saving is called the Behaviour Gap.

Being a psychologist I was then intrigued by this and had to investigate. What are these emotions that cause the behaviours which causes this gap in lost income. The first one I found was something called delayed gratification. Walter Michel is famous for conducting the “Marshmallow Test”.

In this experiment he presented some preschoolers with a simple scenario: “I have a marshmallow, you can have it and I’ll give it to you now. BUT if you wait before eating it, I will give you another one when I return.” He then left the room for an unspecified amount of time and upon his return he rewarded the children who managed to wait with another marshmallow.

This might seem like an unremarkable experiment, but the real value was found in the long term research. The researchers followed up on these children at intervals during their lives and found that on nearly every marker they could think of the children who manages to wait for the second marshmallow performed better.

In other words from being more educated to being happier in their marriages, the kids who displayed delayed gratification managed to outperform their peers. I recently read a blog post with the title: “It’s not the timing of your investment that counts, it’s the time.” People often attempt to time the market to sell high and buy low. The reality is that if you can delay the impulse to cash in your investment and let it grow over time you should walk out with considerably more than what you started with.

The second thing I found when researching this topic is captured in this quote by Warren Buffet: “Success in investing doesn’t correlate with IQ once you’re above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people in trouble in investing.”

This quote correlates with the above point, but it made me look for other mistakes we make as investors.

One aspect that we often find as investors is that we have an inflated sense of self confidence. We won’t attempt to explain that here, however the effect of an inflated self confidence is that is causes us to take less time when making important decisions which increases the risk.

As examples of this behaviour, when you ask anyone if they think they are a good driver, about 82% of people will claim to be in the Top 30% of excellent drivers. 82 does not go into 30 so most people are wrong. Similarly, when people claim to be 90% sure of a fact they are only correct about 70% of the time.

The take-home point here is that if you invest, get advice. Get advice from many people, don’t trust your own judgement 100% and then when you have advice, take the necessary time to deliberate that decision before making a decision.

I’ll leave you with those two points for now. In my next article I will explore some more behaviours that affects the potential value of our investments.

In conclusion, be aware of your behaviour when making investment decisions and while it is important to believe in yourself, be aware that you may still need advice and act on that advice.

Disclaimer – I am not a Financial Advisor and the information contained in this article is not financial advice and should not be seen as such. I am an entrepreneur and investor who tries to play the game and make the most of our time here while trying to leave a better place when my time is up.

Coen Welsh, a qualified industrial psychologist is an expert on the Antecedents and underlying Psychological Conditions predicting Employee Engagement.He has worked in diverse teams in the UK, Egypt and Namibia. Coen regularly gets invited to speak at HR and other conferences. He is a regular contributor to NBC National Radio as well as Tupopyeni and Off-the-Hook on NBC Television. He is a founding member of the Professional Speakers Association of Namibia. You can visit him at www.coenwelsh.com or at www.capacitytrust.com.