Is there any intrinsic difference between an investor who generally makes good investments and one who mostly makes bad ones? If one goes by what the financial services industry appears to believes in, then the answer is nothing. There is no inherent difference. All that anyone has to do is to listen to the right advisers and absorb the wisdom handed out by the financial companies and they can make good investments. However, this view is very different from what many of us actually believe.
Someone like me, who interacts with a large number of investors, finds it easy to believe that there is something inherent about the qualities that make some of us better investors. Those who repeatedly run after questionable investments somehow appear to do so because of some characteristic of their personality.
However, I once read an article that made me think hard about whether this was really true. This article, which was on the fascinating Brain Pickings blog (http://bit.ly/2TJhfX3) summed up some pretty interesting research into the psychology of learning. The article is called ‘Fixed vs. Growth: The Two Basic Mindsets That Shape Our Lives’. What attracted me to it first was the phrase ‘Fixed vs. Growth’ but as it turned out, the words did not mean what they do in finance and investing.
What they meant was a ‘fixed mindset’ vs a ‘growth mindset’. The researchers saw a fixedmindset was more commonly found in people who have an inherent ability or intelligence. Such people try something and succeed without much effort. Then they try something harder and fail, and often regress, limiting themselves to whatever they first succeeded at. They shy away from harder things, staying limited within the kind of thing they first succeeded at.
On the other hand, those who don’t have an inherent ability actually progress. They try something, but succeed only with hard work and dedication. This gives them a valuable life lesson—that effort and hard work brings success. If they work at something, mount a persistent effort, then success will come. They learn that if something is difficult, that doesn’t mean that it’s undoable. It just means it will take higher persistence and a more sustained effort.
By now it should be obvious that this has profound implications on how we invest. There is no reason for any of us to get stuck in a rut of poor investment choices and returns. Many of us try non-optimal, low-return investments and find comfort in predictability. Then, we try some equity or equity mutual funds and find that the going is not so easy. One has to put in a bit of work, choose carefully and even then, success doesn’t come automatically. There are setbacks. But when the setbacks hit, different investors react in different ways. Those with a growth mindset conclude that they didn’t do something right and set forth to fix it. Those with a fixed mindset decide that equity doesn’t work, and retreat to the counterproductive world of fixed deposits and similar products.
In a way, the fixed and growth mindsets have a parallel with the words’ meaning in investments. There are investors with an equity mindset and there are those with a fixed income mindset and members of either group are psychologically incapable of defecting to the other. If you get a debt person to invest in equity, the uncertainty and the stress of the market’s gyrations makes them run away sooner or later even if they appreciate the logic of investing in equity. Equity people consider all debt investments to be a waste of time or money.
We’re all happy when the going is good. However, in stressful times like the present it’s useful to carefully examine one’s responses to the challenge of investing.