Wednesday, November 07, 2007

THE EROI (Emotional Return on Investing)

Has this ever happened to you?

Recently I sold half of a position (large drug company) that I had held for 5 years. Did I have a good reason? Not especially. I figured that as a solid company it was wort owning - I just didn't need THAT much of it.

But - as is always the case with Whack-A-Mole Syndrome (TM) - it immediately started to move up. In fact, it almost seemed that the stock had become aware that I had sold it and used that information as the catalyst to move up 3 percent over the next two days.

Then something weird happened; I found myself rooting against it.

As a rational, self-interested being I was struck by this reaction. After all, since I still owned the stock, every move higher was making me money. But every move up was also a stinging rebuke of my in retrospect completely arbitrary decision to dump half my shares. This resulting conclusion was inescapable; I literally found myself wanting to lose money.

Why would an investor ever want to do that??

It's simple. We invest for an emotional return that more important even then the financial return. In fact, money is never the goal of investing. It is the means to the end, a currency that buys us emotional states (e.g., feeling safe, feeling proud, feeling free).

Unfortunately, sometimes our emotional goals and financial goals are imcompatible.

Being aware of our secret reasons for investing The E.R.O.I (Emotional Return on Investing) is what helps us overcome our psychology and navigate through the emotional mindfield of equities investing.

Are there any times you felt yourself actually wanting to lose money? Feel free to post a response.

In the meantime, happy investing.

Oh! And check out Dr. Peterson's cool book for more great insights into how to become a better investor.

1 comment:

P-Dawg said...

I agree. I find that my day-to-day investing in the market is much more a entertaining activity than a "Spock-like" rational approach to earning the highest return. I have often been a sucker for story stocks.