Investing with My Two Brains

The latest Carrick on Money post declared “my brain is a lame investor” and pointed to a well-written summary of 7 way your brain is making you lose money. Fortunately for me, I feel like I have two brains and only one of them is a lousy investor.

I have one brain that tends to be emotional and makes snap decisions. It’s quite good at deciding whether to zig or zag in a touch football game and helps me pick up tells on opposing poker players. Unfortunately, it stinks at investing. My other brain – the rational one that tries to think everything through and makes deliberate decisions – has turned out to be the better investor.

My years as a stock-picker began during the late 1990s tech boom. Along with almost everyone else, I was overconfident and took wild chances. I did use my rational brain to pore over company reports and accounting statements looking for useful information. However, when it came time to make a trade, it took my emotional brain to ignore the fact that there were almost certainly thousands of people around the globe doing a better job than I was at analyzing the company’s information. My rational brain would have seen the futility of trying to out-trade all these better investors.

In poker I’ve noticed that the bigger the pot, the worse my emotional brain performs. I’ve improved my results simply by taking my time and letting my rational brain work. When it comes to investing, almost all the decisions are for high stakes. I’m far better off making decisions slowly and carefully.

This doesn’t mean that all stock-pickers are acting emotionally. The rational question to ask yourself is whether you are really good enough to trade against the sharks. If you are, then stock-picking can be the rational choice. However, for the vast majority of us, active stock-picking is ignorance or hubris.