I grew up in the 1970s-1980s when there was not a lot of abundance and wealth in most middle-class families. You were happy if you were in the middle class, but you didn’t have much in terms of wealth. Most people were getting by, but working hard to do it. In most families, both parents worked. When something was broken you fixed it, rather than buying a new one. As a child, if you wanted something, you earned money to buy it. Times were good, but people worked hard to keep it that way. There was no “easy” money
Financial Markets are driven by emotions: Fear and Greed
Master your investing emotions, or they will master you
The stock and bond markets are driven by four primary motivations. These four motivations are based on only 2 emotions, fear and greed. Investing is scary if you don’t know what you are doing. It is even scarier if you fully understand the risks through your own experience. Fear is a primal and instinctual emotion. Fear has kept our species from getting eaten by sabertooth tigers and jumping off cliffs trying to fly like a bird.
However when it comes to investing, that same primal instinct clouds the judgment of an otherwise rational educated person and causes him or her to make silly mistakes. In order to be successful as an investor, that fear has to be understood and harnessed in a productive way. I find fear to be the trickier of the two emotions because most people don’t understand how it applies to their own psychology.
Fear: The two fears of investing
The emotion of fear when investing can be broken down into 2 subcategories: Fear of losing money, and fear of under-performing the market (or more commonly known as, the fear of under-performing your friends).
“Every nickel I make gets put back into real estate.”
This is what an investor told me my first week of working on Wall Street. At the time I didn’t understand it, but this quote epitomizes the mind of the typical real estate investor. All they know is real estate, all they trust is real estate, and they are not remotely interested in any other type of investment.
I get it. Real estate is a very attractive asset class. I discussed some of the reasons for this here, These Top 7 Powerful Tools Can Create Legacy Wealth from Real Estate, and Inflation – The Secret to Building Wealth in Real Estate. Real Estate is unique in a number of ways. One of which is the ability to use massive amounts of leverage. When leverage is paired with inflation, you have a powerful combination.
As great of an asset class as real estate is, many real estate investors still come up frustrated.
While real estate investors may choose to invest every nickel they have into real estate, they are reluctantly forced to invest their retirement accounts into stocks, bonds, and mutual funds. Some investors are so turned off by non-real estate investments, they choose to not contribute to their IRAs or 401ks at all. This is mainly due to the “inadequacies” (in their mind) of the other available investments.
If they only knew the truth…
So rather than saving for their retirement in a tax-deferred or tax-free account, and potentially getting the significant tax deductions, they choose to ignore the retirement account option completely. Until now…
“The distinction between investment and speculation in common stocks has always been a useful one and its disappearance is a cause for concern. We have often said that Wall Street as an institution would be well advised to reinstate this distinction and to emphasize it in all dealings with the public. Otherwise the stock exchanges may some day be blamed for heavy speculative losses, which those who suffered them had not been properly warned against.”
-Benjamin Graham – The Intelligent Investor
Are you gambling with your money?
Investing is not gambling.
Gambling is exciting. Gambling is entertaining. Gambling can make you rich… or so you imagine, but the odds are against you. That is why it is called gambling. That is why casinos are such profitable businesses.
There are professional gamblers who play Texas hold ‘em for a living and do quite well. But they are not gambling, they are playing the odds, they have a system, and they know the probable outcome of their “gamble”. There is certainly a large amount of skill involved as well. Reading people, remembering prior drawn cards, and concentrating for long periods of time.
This does not apply to all games of chance, like the lottery. A friend of mine likes to say, “The state lottery is a tax on people who are bad at math.” If anyone ever looked at their chance of winning the lottery, they would not waste a nickel on it, certainly not the rent money. According to the Massachusetts state lottery, the odds of winning a jackpot in Powerball is 1 in 175,223,510. I assume those odds don’t account for potentially splitting the jackpot with one or more people.1
I like investment quotes. They are snapshots of wisdom. An insight into the minds of genius investors. Many of these quotes individually could be the basis of an entire book.
I have been collecting these quotes to add to each post I write. Unfortunately I have way more quotes than I have posts up on this site. So I thought I would compile this list to provide more bite-sized pieces of wisdom for your enjoyment.
“It ain’t over till its over.” – Yogi Berra
For the famous NY Yankee catcher, it is finally over.
The famous “philosopher” and NY Yankee catcher, Yogi Berra, passed away last week at the age of 90. It truly is a sad day for baseball. While Yogi was a famous NY Yankee, he was also well know for his humorous quotes or Yogisms due to their paradoxical and obviously redundant nature.
Even if you are not a fan of baseball or the Yankees (I cannot blame you for that), you might have heard or even said some of his quotes in the past without knowing they were his. In memory of his contributions to baseball and the American lexicon I decided to write this post about his famous quotes and how they apply to the financial markets.