For more information, contact:
Gary Schouborg, PhD
Gary Schouborg (2003). “Zen Investing.”
Buy low and sell high is great advice, if we just knew how to do it. So is making investment decisions rationally rather than emotionally — that is, addressing our circumstances on their merits rather than yielding to greed for gain or fear of loss. We "know" the difference between being rational and emotional but may nevertheless find ourselves driven by emotions more than we find profitable. We rightly see that we lack discipline but may make little headway in developing any. Perhaps we think we lack will power. Paradoxically, the real reason is both subtler and more accessible.
A slow learner, I have taken almost 20 years to base my investment decisions on probabilities inherent in the market rather than on my hopes and fears. Of course, I "knew" from the start that's what I should do. But in my mental muddle, hope and fear were too often the deciding factors. Yes, I studied intensely and analyzed the situation thoroughly before buying or selling. But what really brought forth my final decision was fear and greed, not a dispassionate estimate of probabilities. I was hooked on what I might win or lose. If I was sufficiently hopeful or greedy, I bought or held. If I was sufficiently afraid, I sold or failed to buy. Instead of acting on probabilities inherent in market processes, I was driven by my emotional attachment to desired outcomes.
Investors grapple in various ways with the conflict they feel when making investment decisions. One way I personally have found helpful comes from the Buddhist tradition. It is a simple, non-sectarian method and requires no commitment to pursuing a life-long spiritual journey, though it may open some individuals up to one. To see how it works, consider two examples.
I recently purchased some shares of Sanfilippo & Sons (JBSS). With sound fundamentals and technical characteristics, it was a promising stock. The very day after my buy, JBSS was subpoenaed in a Federal investigation of its industry. The stock tanked 13% that day even though there were no allegations of JBSS wrongdoing. It declined more than 30% in the next few weeks. My disappointment was all the more painful because I had considered buying Brightpoint (CELL) instead of JBSS. And while JBSS tanked, CELL shares tripled.
Assume that I had $1,000 to invest. Begin with the simpler case of CELL, where I timidly failed to buy at the opportune moment only to see the price quickly triple. The overly emotional investor might respond in several ways to this situation:
1) denial = "I can't believe it!" (Repeated obsessively for several days, perhaps erupting occasionally in the ensuing weeks.)
2) shock = I climb in bed, pull the covers over my head, and hope I'll feel better about it when I wake up.
3) repression = I bury myself in busy work. (The more active personality's alternative to # 2.)
4) regret = "Look at that %#@*& keep climbing!" (Repeated bitterly, as in # 1.)
5) desperation = I chase after the stock impulsively, hoping that it will keep climbing.
6) compensation = I buy almost any other stock, hoping to make up for (deny) the missed opportunity.
All six responses are variations of denial, of refusing to accept that I missed out on a golden opportunity. They are instances of emotional attachment in which my decision primarily follows my hopes and fears. In contrast, the rational investor accepts reality:
1) I feel but accept the disappointment that naturally arises from missing out on a good thing.
2) I turn my attention to the $1,000 I still have and I look to see what investment opportunities remain.
3) I do not dwell excessively on the amount of money I might gain or lose. I focus instead on the probabilities inherent in each prospective stock, based on its fundamentals and technical characteristics. Of course, how much I'm likely to gain or lose is part of my risk-reward analysis, but I am emotionally attached when my hopes and fears distract me from addressing the relevant investment issues on their merits.
The second case, where I eventually sold JBSS for a 15% loss, faces me with a more complex situation. Investors commonly react to such a situation with several forms of emotional attachment:
1) denial = "Why did I buy that?" (Repeated obsessively, looking in vain for a good answer that will take away the pain. In this particular instance, the question isn't a rational inquiry to identify mistakes I may have made in my original decision. I had good reasons to buy, but they didn't work out. Repeating the question here merely expresses the wish that I hadn't bought the stock.)
2) self-punishment = "What a fool I am to have bought that stock!"
3) shock = I climb in bed, pull the covers over my head, and hope I'll awaken to find that it was all just a bad dream.
4) repression = I bury myself in busy work. (The more active personality's alternative to # 3.)
5) obsession = I dwell obsessively on the $1,000 that I used to own.
6) gambling = I refuse to sell until the stock gets back to my purchase price, thereby refusing to accept that I have really lost anything. I hope beyond hope that I'll get a big bounce back tomorrow. Or I fear that as soon as I sell, the stock will rebound.
7) reaction formation = I impulsively sell the stock, distancing myself from the experience as quickly as possible.
All seven responses are variations of emotional attachment, of refusing to accept my loss. In contrast, the rational investor accepts reality:
1) I feel but accept the disappointment that naturally arises from any loss, particularly one so unexpected and unfair.
2) I turn my attention to the present. The fact that I used to have $1,000 is irretrievably history and irrelevant to my present decision. I now own a stock worth $850. What investment opportunities does this fresh situation present for me?
3) I let go of any impulse to recoup my losses. Such an impulse is irrelevant. As the advaita teacher Poonja says, the enlightened individual is one without history. All that matters are the probabilities inherent in my present situation.
4) I address my situation afresh. What are the opportunities for gain or loss by holding this stock? Do they suggest I hold or sell?
5) Are there better opportunities elsewhere? Perhaps I should sell JBSS to pursue better opportunities.
6) I study my original investment to see where I might have gone wrong, so I can make better decisions in the future. The focus here is on better understanding the market processes themselves, not on dwelling obsessively over past mistakes.
7) In all these considerations, I don't decide based on the hope that I could double my money or the fear that I could lose everything. Instead, I decide based on the likelihood that the stock will resume its upward trend or break down further. Certainly how much I'm likely to gain or lose is part of my risk-reward analysis, but my hopes for gain and fears of loss are not the primary drivers of my investment decision.
This completes the first phase in managing our emotions while making investment decisions: identifying possible ways in which investors respond to profits and losses. The second phase is for each of us to identify the ways in which we ourselves usually respond. These two phases prepare us for the third phase of deciding rationally instead of emotionally.
A common misconception often arises at this point that acting rationally is a matter of will power. In fact, rationality requires that we awaken to our inner feelings, particularly that we become aware of those instances when we are unnecessarily creating tension for ourselves. In the rush of everyday practical living, most of us are so intent on developing sophisticated perceptions of outside reality that we largely overlook our inner experience. Consequently, we fail to realize how much inner violence we are doing to ourselves. Paradoxically, we see our greed for profit and fear of loss as operating in our self-interest, whereas they are actually doing us violence. To acquaint ourselves with how much our everyday behaviors and attitudes are really nourishing us and how much they are doing us violence, we need to refresh ourselves with some quiet time alone. In quiet moments of reflection, we nourish our creative and healthy inner experience, the font of our rationality.
There are many ways we get acquainted with ourselves through quiet time. One method from the Buddhist tradition is for us to sit quietly alone for ten minutes a day and simply attend to our breathing, growing increasingly aware of our thoughts and feelings as they come and go. Most surprisingly to the Western mind, there is nothing we need do here. We simply focus our attention on our breathing as we breathe in and out naturally. When distracting thoughts and feelings disrupt our attention, we gently let go of them and return our attention to our breathing. We don't let ourselves get impatient with the distractions, because the aim of this quiet time is simply to become non-judgmentally acquainted with ourselves, of which distractions are a part.
By sitting quietly and non-judgmentally noticing our thoughts and feelings as they come and go, we learn to accept them. And in accepting them we come to understand that we need not act on them unless we have good reason to. In other words, our impulses to act lose their power over us. As a consequence, we grow increasingly aware of the peace that we feel when rational and the stress that we feel when overly emotional. Over time this growing awareness chooses rationality for us. In the same way, it is not through will power that we choose to eat tasty rather than bitter food. If we can experience the difference, the decision is made for us. We will naturally gravitate toward the more pleasant food. So it is with investing (and every other kind of decision). We will naturally gravitate toward rationality as we grow increasingly aware of the satisfying calm associated with it compared to the painful stress associated with grasping, rather than aiming calmly, for profit.