Brain Damaged Investing
I’ve been thinking about Warren Buffet’s two most important rules for investing:Â Â Â Â Â Â Â Â Rule #1.Â Donâ€™t lose money.
Rule #2.Â Donâ€™t forget rule number one.
A couple weeks ago I bought a stock [CDH] at $3.10. A few days later it hit my loss exit price [I had one set for 2.90 and the other for 4.00]. Too afraid to miss the ‘inevitable’ turn upwards, I rationalized my decision not to sell and adjusted the sell price to 2.80.
The next email alert arrived a couple days later. By now I didn’t want to admit I was a fool and so I held on, sure that it would continue it’s run upwards. Then the company announced a private placement at 2.40 and that’s where we sit today; probably will for a good while.
Powerful emotion number one that I listened to: fear of missing a payoff. Powerful emotion number two that I listened to: fear of making a mistake.
The lesson is clear. Don’t make investment decisions with your feelings. Easier said than done. I know better; that’s why I go in with an exit strategy for a move up and down. It is liberating when you sell at either point. So, the cost of not following my rules is that I am forced to book a 25% loss or wait for the company to assimilate the new shares into it’s value. Both are not very appealing choices.
Then I was reading JLP’s AllThingsFinancial and I saw that he had linked to this excellent story in the Wall Street Journal about how certain brain damaged people had done better in investing studies than so-called “normal” folks.
The 15 brain-damaged participants that were the focus of the study had normal IQs, and the areas of their brains responsible for logic and cognitive reasoning were intact. But they had lesions in the region of the brain that controls emotions, which inhibited their ability to experience basic feelings such as fear or anxiety.
The story outlines that the lack of fear and anxiety led the brain damaged investors to take more risks that resulted in larger payoffs and that to suppress or to gain control over their emotions was one of the key factors to successful investing. I hear ya!
They don’t react emotionally to things. Good investors can learn to control their emotions in certain ways to become like those [brain damaged] people.