Fear and Greed. 

You’ve read it a thousand times; these are the two key emotions that drive Wall Street to its vertigo-inducing highs and its gut wrenching lows. You’ve read it a thousand times because it’s true.

Fear can paralyze people to the point that they never invest.

Greed, on the other hand, entices people into the market at all the wrong times, into investments they don’t understand, into speculations without intrinsic value and keeps them invested in junk that’s long past its expiration date.

Fear is not bad. Greed is not bad. Both emotions serve a purpose, your job is to know how they each can help you attain your long-term objectives-based goals. These powerful emotional drivers don’t have an easy to use on-off switch, and in most investors, one of these drivers will be more predominant than the other. 

For instance, the relentless IPO investor on their constant quest for the next big thing will exhibit an unusually high G drive, but the ever-cautious yield seeker has an F drive that will keep them continually treading in shallow water. It’s your job as an investor, the steward of your family’s finances, to keep both of these opposite poles in check if you want to win.

Yet lurking under the topline F and G drives, there may be many other biases, behaviors and emotional responses that can derail any type of personal investing plan if not identified or understood. Effective investing is about recognizing your own patterns of behavior and your responses to external forces that are driving the markets. Up or down, you can’t afford to be either terrified or cocky, so finding the balance between your personal F and G will help you create wealth, rather than destroy it. Time will teach you that you need to keep your head in all market conditions, up, down or sideways.

From First, fix the Investor:

Markets are efficient. What’s that mean?

EMH theory (Efficient Market Hypothesis)* states that it is impossible to “beat the market” because existing securities prices reflect all available and relevant information at any given moment. This is stock market efficiency, and the EMH theory predates the internet by many decades! Passive investors, the proponents of passive portfolio management, consider this to be doctrine, and buy index-based exchange traded funds that track market performance. **

If you prescribe, as we do, to the opinion that financial markets are inherently efficient, and that all available intelligence is already plugged into the price before you even think about the trade (making it very difficult to “beat the market), it stands to reason that your time and energy will be best spent of fixing you, the investor.

Behavioral Finance and the Private Investor

Face it: if your returns, or lack of them, have kept you from achieving your personal financial goals, then “first, fix the investor” may be a welcome concept. Behavioral Finance is about psychology, your psychology. Get it right and your wealth picture improves. Get it wrong, or deny that it is the factor that can produce the most punch to your bottom line, then prepare to make the same mistakes, and continue losing.

Getting investing right means a more comfortable life, ideally free from financial worry. 

Getting it right means building solid, dependable portfolios, based on financially measurable goals. 

Getting it right entails a series of initial and ongoing decisions that are simple and straightforward, not complex and challenging.

Taking complexity out of the creation and ongoing management of your financial portfolio should be your key goal, but it can only be achieved after your emotional portfolio is in check

Biases, heuristic biases, such as mental accounting, confirmation bias, hindsight bias, anchoring, herd behavior and other known biases, can kill portfolio performance. These are natural human traits so we have to be able to identify them and work around them. Let’s take a look at overconfidence


We already know that investors are an emotional bunch, each exhibiting some proportion of both F and G drives, generally one more than the other, but high G investors are especially at risk of being overconfident. Intuition generally rules the day, with little time to take into account statistics and probabilities. Or even facts!

Image source: David G. Klein

Overconfidence feeds on bull markets. You may have heard that “bull markets make geniuses,” and its this accidental and inexplicable success that can start a very dangerous self-deception. When you begin to believe that its your special brand of genius that allowed you to make a few bucks in the market, the problem will get worse. Another Wall Street aphorism, “A rising tide raises all boats,” should be remembered, especially by the overconfident G-driver, because guess what? A falling tide sinks all of them, too!

But the happy, sometimes oblivious G-driver becomes dangerously comfortable with their own ability to forecast market winners, even in the face of a personal history of incredibly bad choices. They can’t see their own overvalued sense of “skill,” nor can they see that a stock or sector is overvalued by the market and that they are trading at the disadvantage of not having all the information or the facts. They dive in anyway, certain that their particular brand of genius will win the day.

Is this you? Do you recognize the “O monster” in yourself? You may be at the top of your game in your own profession, a skilled surgeon or a talented tradesman, but do these skills carry over to your ability to make smart, informed choices with your money? Take a minute to linger on that point. You are skilled at many things in life, but is your ego in the way of creating lasting wealth for yourself or your family? Open your eyes and take an honest assessment of your past money experiences and see if that isn’t true. It’s time to get out of your own way.

What is the antidote to overconfidence? 

Fixing the issue may be require different strategies for different people, but developing an overarching strategic plan, one that plots out a decision making process for the future is the starting point for most investors.

By getting a handle on your biases and behaviors, and then a handle on objectives-based financial strategies that make sense for you, you will have built a foundation upon which your decisions will be fact-based and void of emotion.

After that, you will find yourself worrying a whole lot less!

*Eugene Francis Fama, American economist, is credited for the so-called Efficient Market Hypothesis (EMH). His most famous article was published in May 1970 entitled “Efficient Capital Markets: A Review of Theory and Empirical Work” (Journal of Finance 25 (2): 383–417.). One of the articles first sentences is well known and quoted: “A market in which prices always ‘fully reflect’ available information is called ‘efficient’.”
**Relevant Morningstar Inc. data supports the conclusion. From its June 2015 Active/Passive Barometer study they compared active managers’ returns in all categories against a composite made of related index funds and exchange-traded funds (ETFs). Year-over-year, only two groups of active managers successfully outperformed passive funds more than half of the time: U.S. small growth funds and diversified emerging markets funds. (Source Morningstar and Investopedia)

Never. Lose. Money.