Emotions and Investing

I hope everyone is continuing to stay happy, healthy, and hopefully you’re making some awesome investments and some really smart decisions. You’re growing your net worth. You’re creating some passive income with real estate. You’re taking massive action. You’re doing all of those things that you’ve been watching videos and you’re supposed to do.

Making smart, rational decisions is important, but today, I want to talk about emotions when it comes to investing. 

Now, you may have heard that you really don’t want to use emotions to guide your investing. That’s absolutely true. If you’re using your emotions to guide your investing, you’re not using the frontal lobes in your brain that dictate higher thinking in logic. You need to be as emotionless as possible and really be able to look from a clean slate. If you can’t remove yourself from the situation to kind of see from a 360000 foot level of the entire situation and not from the perspective of your own biases your own emotions and your own just personal feelings about something, you’re not going to be able to make a truly unbiased empirical logical decision.

A recent episode of the Freakonomics podcast hits on exactly this emotional perspective. Maria Konnikova starts with the context of a poker game and argues persuasively about the importance of detachment and how, when you “learn to see yourself from an external perspective,” you can “spot the errors that you make in your decision process.” Emotions can be a significant barrier to this detached frame of mind:  “We don’t notice that we’re making a decision while angry because we don’t stop to assess, ‘Oh, I’m angry. What’s making me angry?’ We just don’t have that sort of internal conversation.” Konnikova links this essential poker insight to professional, personal, and social success. Whether you’ve bet too much on a bad hand or you’re chasing a bad investment, taking a deliberate step to examine the emotions and motivations behind your decisions can help you seize great opportunities and recover from unfortunate situations outside of your control.

If you allow your emotions such as fear, greed, or excitement to seep in, your entire brain is going to be focused on dealing with those emotions, and you’re not going to be able to think clearly. Most likely, you’re going to make a decision that isn’t necessarily the best. Now this applies to any aspect in life, but when you’re talking about putting your hard earned money on the line, it’s even more important. 

If you watch Star Trek, this is exactly what the Vulcans do, and their entire philosophy is built on this rationality. They take logic and they put it up on a pedestal, and they try to purge themselves of all emotion entirely and only use that logic to guide all of their decisions, all of their actions, and all of their thought. Now I don’t think that’s the right thing to do. Emotion does have a piece to play in everyone’s life, but you have to be able to control your emotions. Like I said you have to be able to take a step back and remove yourself from a situation. You’ve probably heard the saying “you can’t see the forest for the trees.” If you’re looking at a tree, you won’t get a full view of the forest. You’re not going to be able to have a perspective on what’s actually occurring.

It takes practice, but by taking a deep breath and removing yourself, you can have much more clarity of the actual situation that’s surrounding you. You’ll be able to process what’s going on and take the correct action required to achieve whatever you’re trying to accomplish. 

So, where can you use emotion though in investing, and how can you use it as a tool? You can really only do this once you’ve mastered the technique of being able to control your emotions. Once you are able to turn your emotions off, you will be able to dictate what’s going on and have a clear understanding, but you can use your emotions almost like a sensor, turning the spigot of your emotions on you can start to build empathy and try to understand the situation from others’ point of view. This understanding of others, it should be noted, is hard to acquire if you are caught up in your own emotions.

For example, let’s say you’re looking at an apartment building. You’ve turned your emotions off when you’re analyzing. You know the location, the financial analysis, the demographics—you’re doing everything that you do when you look at a property rationally, using one hundred percent your frontal lobes. You’re just trying to analyze it based on empirical evidence and research, but residents and potential renters don’t rent based on logic, reason, or with a spreadsheet. They’re using their emotions. By tactically turning your emotional spigot on, you’ll be able to identify the things that matter to residents and potential renters.

What kind of feeling do you get when you walk on a property? Do you have any emotional connection? Do you feel safe? You do feel at home? Maybe you feel community. Well, that could be a good indication that a resident or potential resident may have that same connection. Then you can turn it off. Take it back. Use it as another piece of evidence. 

Now, you have to be careful with this, and again, it’s all about practice and using it at the right time and the right level. I’m not saying that you purge emotion from yourself entirely. With family and friends, emotions play an important part in all of our lives. They are a part of the human experience. But you should be able to control and regulate your emotions. Turn them on and off at the appropriate times. You’ll be able to achieve much more success, make clear decisions, and I guarantee your investment career will accelerate faster. You’ll see better results. 

For example if you’re looking at several different investment opportunities it’s easy to allow emotions to creep in. Well I like this part of town. I like this market. That’s where I. That’s where I grew up. My father’s from that neighborhood. Sure, it would be great to tell Dad, “I’m buying a property where you used to live.” Well, if that investment is going to lose money, then the warm emotions of nostalgia can’t really help you.

Your investors probably won’t have that same nostalgic emotional connection. The next buyer doesn’t have that emotional connection, and your residents may not have that emotional connection. 

By being able to regulate control and understand how you’re feeling and being able to compartmentalize it, you can look at multiple opportunities and make an actual specific reasonable decision based on logic and reason not emotion. So again, emotion plays a key part in all of our lives. It’s a part of the human experience, and you have to use it as a tool. You have to be able to control your emotions, and if you do that, I guarantee you’re going to see a lot of success.

We can even take it a step further. Let’s say you make all these logical decisions, and you develop the emotional control that allows you to see from the perspective of your residents and your investors. You take special care to cultivate this detachment and discipline. You still need to keep in mind that you’re never going to be completely separate from your emotions. Think about it: All of your decisions are appropriately logical, but what is it that is motivating that logic? What is it that has driven you to this career in the first place? That passion, that motivation, is incredibly powerful, but the minute you think that you’re above your emotions, that’s when they can start to creep in and overwhelm your decisions. Part of emotional control is realizing that there is always an emotional part of your brain that motivates you, but once you identify that, you can use it to your advantage, to propel you forward without holding you back.

All right. This interesting. Do you disagree or you say this is B.S.? You know you have to use emotion. You know Star Trek sucks? That’s fine. Happy to have the conversation. Comment below.

If you are interested in multifamily real estate and you haven’t signed up to receive our newsletter, you’re totally missing out. We compile about every important article and research report that comes out every single week. We deliver it to your inbox every Thursday morning at eight thirty. So click the button below. Give us your email, we’ll keep you on top of the best and brightest ideas in multifamily real estate.