As a father of two adolescent children, the new Inside Out movie was a highly relatable and thought provoking sequel to the first. Each emotion accurately depicts what I see my children go through (and quite frankly what I go through) on a day-to-day basis.
My personal favourite in the movie was Ennui (a French word that describes tiredness and boredom) just because of how accurately it depicts my children’s coping mechanism.
The investor in me, though, almost immediately responded to the parallel that the new emotions in the movie have with investing behaviours. This is because investing deals with money, and money management can be a highly personal affair, involving emotions on different levels for many of us.
Taking centre stage in the sequel is Anxiety – a character (or emotion) that needs to be in control and needs to act. Albeit, with the best intentions, the character is not able to rest. This is akin to an investor reacting to market moves and macro headline prints in an attempt to outsmart the market.
There always seems a good reason why you should take action but often the complicated reasoning in your head tends to take a life of its own and clouds your judgement. A great recent example is how many people became bearish at the end of 2022, with strong conviction that a recession would happen only to miss a strong subsequent equity rally.
The flipside of anxiety is Envy, which is staged in the market as a continuous pendulum of fear and greed. If anxiety is fear then envy would be greed.
Whether it is the recent AI-driven rally in a select few names or Bitcoin’s resurgences in the last few years, you must have heard stories of someone who has made a lot of money on something you don’t own. However, this envy tends to lead investors to take more risk than their risk appetite allows as the returns overshadow the risk.
Two sides of coins: Anxiety and Envy, returns and risk
You cannot expect returns without risk. On that note, having an appropriate level of anxiety (risk) and envy (return) is probably a good thing. However, many people find it hard to manage these emotions when it comes to their own personal finances. This is a reason why for most investors (even the savvy ones), it is likely better to outsource the portfolio management to an external party.
The first two may be rather obvious emotions that relate to investing. The third character Embarrassment may be more subtle. Imagine you made an investment which was under the water for a long time and the moment it broke even you decided to get out.
What made you hold on for so long, and what made you sell the moment it broke even? It is less likely to be based on a rational assessment or the probability of how the investments will do going forward or whether it is the right investment for your goals; it is more likely because you didn’t want to feel the “embarrassment” of locking in the losses.
If the investment is not aligned with your goals or has deviated from what you thought it was, you should be able to cut your position even at a loss.
But, on the flipside, if the investment is aligned with your goal and is doing what it is supposed to do, you should continue to hold on no matter how much profit it has generated.
Professional investors tend to ride the winners and cut the losers early but retail investors often do the opposite of holding on to the losers and taking profit on the winners too early. This is because “looking good” often takes precedence over “making money”.
It's always better to ask than to assume
Another example of embarrassment I often see people make in investing is hesitating to ask questions. It is much better to ask a seemingly basic question early rather than assuming something that you are not sure and regretting later.
The last character in the sequel and my personal favourite is Ennui. This emotion is described as a teenager’s coping mechanism and quite frankly one of the reasons social media and short videos are so popular.
When it comes to investing, a lot of people show a similar behaviour. There is not much interest in goal-based investing and subsequent asset allocation, diversification, and the consideration for ongoing cost. Instead, the interest lies in the trending newsflow, subject, stock, or something worthy to talk about among your inner circles.
The impact of asset allocation, diversification, and cost savings seem too slow and “boring”. However, learning to embrace the boredom of diversification and time in the markets is the key to the long term compounding of wealth.
Bonus: Nostalgia
A bonus character in the movie is “Nostalgia”. This is probably more relevant for the seasoned retail investor who has experience making a lot of money on an investment in the past and bases a significant amount of judgement on that experience.
Or, it could be the investor who has that bad experience on a certain asset class and vows to never touch it again (even if it makes sense to have it in the portfolio). Value investing over the last decade and fixed income investors over the last 3 years may fall into this camp.
Humans are inherently influenced by a multi-faceted set of emotions that can impact the way one invests. Controlling emotions can be extremely challenging.
However, understanding and acknowledging one’s own investing biases, emotions, and habits helps you become a better investor. A lot of these would be overcome by having a predetermined goal based and diversified investing philosophy where you don’t have to spend too much time and effort worrying, feeling envious, embarrassed or being tired of investing.
Hopefully, your Nostalgia will one day recognise your turning point to long-term, goal-based investing.
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