3 Reasons You're a Better Investor Than a Psychopath
A few weeks ago, my fellow Fool Morgan Housel wrote an article that described the benefits of a singular trait psychopaths would hold during the pursuit of investing -- the ability to suppress emotions when dealing with the loss of money. And while it's true that the negative emotions connected with losing money can seriously hurt the chances of your success as an investor, there are a few characteristics of psychopaths -- or, the more PC term, sociopaths -- that hinder their ability to be a really good investor.
A quick intro to sociopaths
In her memoir titled Confessions of a Sociopath, M.E. Thomas detailed her life as a functional psychopath, including her feelings toward money. Though she stated that she's able to feel emotions, she couldn't always determine what they were or why she was feeling them, so she just let them pass. In terms of investing, this helped her view the process as a game, with the money she had playing the simple role of a tool she used to make more money. Much like the scenario discussed in Morgan's article, Thomas wasn't afraid to continue investing after a loss, simply because she viewed the event as a statistical inevitability in the process of gaining more wealth.
Psychopath shortfall No. 1: No emotional gauges
Though this is the stated advantage in both Morgan's article and Thomas' book, the inability to use emotions to gauge a situation is the key downfall for a psychopathic investor. As Morgan described, emotions can hinder your ability to profit, but they can be helpful when choosing your investment strategy. One of the key decisions you need to make as you begin (or continue) investing is your risk tolerance. Higher is not necessarily better, especially if you're in the later stages of your career and close to retirement.
In addition to risk tolerance, there is a key emotion that can help signal when you're not headed in the right direction: stress. The body's physical response to stressful situations is a great indicator that you need to re-evaluate. Though many of us have too much stress in our lives already, the particular stresses that come from investing can be very telling. A positive stressor is something that we feel is challenging, but ultimately something we can control. If you're investing in such a way as to manage your risk profile, investing should be a positive stress. Of course there will be ups and downs in the market that are out of your control, but if your stress levels rise dramatically when thinking about your investments, you should look at whether you've kept in line with your initial strategy, or perhaps strayed away too much.
Psychopath shortfall No. 2: Lack of long-term goals
To paraphrase Morgan when he asked what makes a good investor, it takes someone who is calm and has a long-term view. According to the Diagnostic and Statistical Manual of Mental Disorders, a psychopath is one who categorically lacks long-term goals. Without a long-term strategy, investors can fall into the trap of over-trading, which plenty of studies have shown leads to losses or dramatically smaller gains. Because of an intense need for stimulation, sociopaths are risk-takers and prone to boredom. These attributes could lead them to actively trade their shares to grab small gains, thereby losing out on the long-term benefits of holding a stock. It can also lead to higher levels of stress for an investor.
In a study completed during the late 1990s, researchers found that the average household turned over 75% of its portfolio each year. Doing so increases not only transactional costs and taxes, but also the risk those portfolios face. With a long-term focus, investors can wait out downturns and dips, but by frequent trading, you negate the benefits of holding on to the stock through those same periods. The study found that portfolios with higher rates of over=trading resulted in returns of 11.4% versus the average household return of 16.4% and market returns of 17.9%.
As the study's title stated, over-trading can be hazardous to your financial wealth.
Psychopath shortfall No. 3: Delusions of self
One of the other traits psychopaths share is an overinflated sense of self-worth. This issue ties in to both grandiose and unrealistic plans, as well as more traditional narcissism. When tying it in with investing, we can look back at Morgan's article, where he described the inability of investors to estimate their performance if they're not fully keeping track. But this isn't just something the average investors experience. Psychopaths can thank their sense of self-worth for the same thing.
Because they believe so highly of themselves, it becomes difficult for psychopaths to acknowledge or learn from their mistakes. Though they may have lost a huge sum of money from a bad trade (or too many trades), their feelings of superiority and lack of emotions tied to losing may not allow them to recognize that they made an error and learn from the experience.
You're better ...
Acknowledging that your emotions can get the better of you, as well as your portfolio, is one of the first steps to becoming a better investor. But with those emotions, you have valuable tools that can help warn you if you're headed in the wrong direction with your trades or if you're taking on too much risk. Though a psychopath clearly has the calmness requirement down, his or her lack of emotions and long-term planning can really cost that person the chance to be a great investor. So don't get down on yourself for not being dismissive of your emotions -- use them, learn from them, and keep trying to be the best investor you're capable of being.
Not investing yet? What are you waiting for?
Millions of Americans have waited on the sidelines since the market meltdown in 2008 and 2009, too scared to invest and put their money at further risk. Yet those who've stayed out of the market have missed out on huge gains and put their financial futures in jeopardy. In our brand-new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal-finance experts show you why investing is so important and what you need to do to get started. Click here to get your copy today -- it's absolutely free.
The article 3 Reasons You're a Better Investor Than a Psychopath originally appeared on Fool.com.Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.