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Know yourself MIchel Pireu     | Business Day Tuesday, April 2, 2019
“This is no science. It is an art,” wrote Adam Smith in the money Game. “Now we have computers and all sorts of statistics, but the market is still the same and understanding the market is still no easier. It is personal intuition, sensing patterns of behaviour. It’s a kind of locked-in concentration, a feel, nothing that can be schooled. The first thing you have to know is yourself. If you are not automatically applying a mechanical formula, then you are operating in this area of intuition, and if you are going to operate with intuition – or judgement – then it follows that the first thing you have to know is yourself. You are – face it – a bunch of emotions, prejudices, and twitches, and this is all very well as long as you know it. Successful speculators do not necessarily have a complete portrait of themselves, warts and all, in their own minds, but they do have the ability to stop abruptly when their own intuition and what is happening ‘out there’ are suddenly out of kilter. A couple of mistakes crop up, and they say, simply, ‘this is not my kind of market,’ or ‘I don’t know what the hell is going on,’ and return to established lines of defence. A series of market decisions does add up, believe it or not, to a kind of personality portrait.”

Every investor has their reasons for investing, with different time horizons and ability to handle varying degrees of discomfort. Is safety of principal with some level of return sufficient? What is your risk tolerance? How much of a drop in the value of your investments can you stomach? Do you want to be involved, or are you more the set-and-forget type? All of these questions are about you.

As much as you need to know the market, you need to know yourself. Can you handle staying in when everyone else is jumping ship? Or getting out during the biggest rally of the century? There's no room for pride in this kind of self-analysis. The best investment strategy can turn into the worst if you don't have the stomach to see it through.

According to Kathleen Gurney there are primarily nine investor types. 1. Perfectionists: Afraid of making financial mistakes, who tend to avoid investment decisions altogether. For them, no investment is without fault. 2. Safety Players: Who take the path of least resistance, looking primarily for security and safety in their investments and doing what has worked previously. 3. Optimists: Low-risk orientated, often near retirement, seeking peace of mind, who don't like to become too involved as it might cause stress. 4. Producers: Highly committed professionals who risk underperformance due to a lack of self-confidence in money matters. 5. Achievers: Conservative, risk-averse investors that like to feel in control, with security and protection of assets the main concern – with a belief that hard work and diligence are more likely to bring financial success than investing. 6. Entrepreneurs: A category driven by a passion for excellence and commitment, less motivated by money than success. 7. Hunters: Well educated, high-earners with an impulsive streak, and a 'live now attitude'. 8. High Rollers: Thrill seekers, power seekers, creative and extroverted, whose actions may have financially dangerous consequences. 9. Money Masters: Who have a balanced financial outlook, like to be involved with the management of their money, choice of investments, and are willing to take advice - determined individuals, who don't leave much to luck.

Which type best describes you? Are you sure? You may be more of a safety player than you realise; more timid, less self-assured, less of risk taker than you’re willing to admit, even to yourself. Alternatively, more of a high roller, putting more at risk than you can really afford to lose. If you can’t decide which category you fall into it, it doesn’t matter. They are most likely too broad in terms of self-knowledge, therefore not accurate enough to guide action. Most of us don’t have an accurate portrait of ourselves, not really. Introspection is seldom given the recognition it deserves. We’re rarely encouraged to unpack our thoughts, even less our feelings. Psychotherapy, the go to for analysing oneself, interests barely 1% of the population.

But, that’s the problem. Without a proper understanding of ourselves we’re bound to remain vague about our ambitions; we run the risk of lurching from one strategy to another or locking ourselves into a cage from which it will take decades to emerge. We may be too modest and miss out on opportunities. Or, overly confident, getting involved in things that we shouldn’t. We lack a clear sense of our potential and limitations.

If self-knowledge is so important, why is it so hard to come by? Why is it so difficult for us to get an adequate understanding of ourselves?

It’s not a question of laziness or stupidity. Unfortunately, there are huge cognitive frailties that make it hard for us to have certain kinds of insight about ourselves. We’ve evolved into creatures whose minds are divided into conscious and unconscious processes. The reason is bandwidth. We simply couldn’t cope if everything we did had to be filtered through the conscious mind. We are vulnerable because a little too much of how we behave happens unconsciously. The default balance between our conscious and unconscious behaviour appears to be wrong, we are incentivised to let too much of who we are happen in the unconscious. We could undoubtedly benefit from a tighter grasp of what is going on, but would have to make heroic efforts to bring more of ourselves into the conscious realm. As Freud put it, there is extraordinary ‘resistance’ to making a lot of our unconscious material conscious. We’d rather stick with the more comfortable version of ourselves.

When it comes to investing we’re especially at risk of paying too-high a price for this shortcoming. We can’t properly aim for, and thus achieve, our full potential. We are fatefully vague about stuff. Our initial response to financial strategies and investment alternatives are of the order of ‘yum’ or ‘yuk’. We’ll blithely proclaim that what we want is financial success without knowing what we truly mean by that. Investing becomes a magnet for other hopes that don’t really belong there. We come to believe that if things go well when it comes to money, other problems will be solved too. It’s a line of thought that is strongly encouraged by contemporary society. Consequently, we run the risk of investing in the wrong way and in the wrong things.

These are not personal problems. They’re universal. The first reports from our conscious minds are just by nature horribly vague – and in need of sustained analysis.
 
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