Advice for Keeping Emotions Out of Investing Decisions

Emotions are involved in every business decision entrepreneurs make, regardless of what they tell themselves. Veteran entrepreneurs and expert financiers like Jason Sugarman knows how difficult it is to keep emotions out of business decisions. Warren Buffett famously said, “Be fearful when others are greedy and greedy when others are fearful.”  This one investing axiom aside, there are plenty of others for new investors to mind. Mr. Sugarman offers this advice to help newbie investors make business decisions without the lizard brain getting the best of them:

Understand that Investing is Inherently Emotionally Biased

Unless you are an algorithm, then your investing decisions will naturally be affected by emotions. Greed, after all, is an emotion. Researchers have found that there are more than a hundred biases that affect decision making when it comes to investing. One major bias is what financiers call “loss aversion,” where an investor dumps stakes with bad returns and invests in a more lucrative venture. The point is, all investors must be aware that there are biases involved in the process. The challenge is to overcome them, not to ignore them.

Don’t Make Investments When You are Emotionally Vulnerable

It goes without saying that it’s never a good idea to invest in anything when the investor is too angry, feeling sad, or even too excited. Strong emotions don’t drive reasonable decision-making. Therefore, investors should wait before making major investment decisions in the spur of the moment.

It’s also strongly advised to be aware of emotionally-driven assumptions when making an investment in a sector you are passionate about. Mr. Sugarman, for example, is a huge sports fan. He also invests in various sports teams, like the Los Angeles Football Club (LAFC) and Team Liquid e-sports team. Though Mr. Sugarman loves the games, his fandom doesn’t drive his investment decisions. Likewise, new investors should be cautious when putting money where passions are.

Use Rational Measures to Make Evaluations

Emotions are never a good measure of how worthy an investment is. Being a massive fan of Clayton Kershaw, as Mr. Sugarman is, isn’t a good enough reason to invest in the Dodgers. He advises using rational and emotion-free methodologies like the price-earnings ratio to measure the worth of an investment instead. Use the right reference points to know how much your stake in a venture is really worth.

Learn to be a Disciplined Investor

Successful investors are often highly disciplined investors. That is to say, people who learn how to keep emotions away from investment decisions often succeed. Therefore, aim to become a disciplined investor. Reign in your natural aversion to negative outcomes which could drive you towards a seemingly positive investment that ends up being a complete disaster. Keep your greed and confidence in check to avoid making terrible investment decisions as well.

Emotional decisions are often bad decisions, and this is never truer than when investing. Mr. Sugarman’s ultimate advice is to be aware of your own emotional weaknesses and make investment decisions in accordance with rational metrics. There’s no one formula for success here. But being disciplined, as explained above, helps a lot.