Over the past two weeks, we’ve talked about the emotional undercurrents that make investing difficult and the systems we can use to protect ourselves from emotional undertow. This week’s note talks about what kind of person we become when we move through the emotional chaos and master the systems: a calm investor.

Practice and Repetition

The cognitive burden of new tasks is always high, because the neural pathways related to that task haven’t fully formed or your brain hasn’t figured out which pathways to use. But every time you repeat a task, it gets easier, to the point where it eventually becomes second nature.

The same is true for investing, finance, and the systems that underpin good outcomes in these arenas. When I was a portfolio manager, and we first started doing security lending from our bond portfolio, the process felt clunky and disorganized to me. Over time, not only did we gradually make improvements to our process, I got used to the process itself and became second-nature.

The accumulation of “ease” also applies to your personal financial systems. The first time you use your expense tracking worksheet, the process is cludgy—you don’t like how the spreadsheet looks, you forgot the login for your rarely-used credit card, and your business bank labels columns differently from your personal bank. The second and third time you use your worksheet, you’ve already solved some of the data problems and those that you haven’t solved, you have anticipated and already have a plan for how to solve them.

Less activation energy, more speed.

Emotional Detachment

Negative emotional responses to difficult actions also diminish over time.

Think back to any task that at one time felt scary for you—speaking in front of an audience, starting a conversation with a stranger, stepping out onto the dance floor. As you repeated these actions more and more times, they probably felt less and less scary. You now may be at the point where doing the thing that once felt scary now produces no emotional response in you at all.

This is developing a “thick skin” and it also works in finance and investing. Veterans of investment booms and busts not only recognize the patterns of euphoria and depression, but they gradually become desensitized—not in a bad way—as well. Fear—an emotion linked to survival—stops getting triggered, because through experience, we learn that losing money on a bad trade isn’t fatal and if the trade is sized properly, doesn’t have any impact on our well-being at all.

I imagine the reduction in emotional stress and the reduction in cognitive burden are related. As things become less cognitively difficult, we become better at them, and start receiving positive emotional reinforcement when we do them (e.g., satisfaction at getting my expense tracking spreadsheet updated and organized). That positive emotional reinforcement starts to become something we can anticipate and even crave, which can overwhelm emotional states like overwhelm, boredom, and procrastination.

Becoming a Machine

When we practice using our systems, and experience the emotional ups and downs of using them over and over, everything about them becomes automatic. They require little cognitive or emotional energy.

The end result of this process is that our financial management systems—a necessary requirement to function in a capitalist society—become second nature, freeing up energy for the things that matter more to us. When I’ve learned to accept that market spikes and crashes are going to spark emotional responses in me, and I get used to feeling those emotions, and I have a system I’ve practiced using to manage my money, I start spending less and less time thinking about what is going on in the market. That means I can spend more time on my painting project, planning my vacation, or even figuring out how to make more money.

When we become machines, we stop thinking about “how do I feel about this” and just execute. Executing over and over again, compounded, builds mastery. This is what calm investors look like. They trust their systems and their systems have become second nature.

Mastery looks boring. It also leads to results, and results take time.

The best time to start was yesterday, and the second best time is right now!

Exercise

Journal on the following or discuss with a friend.

1)      Reflection

In what areas of my life have I become machine-like in my execution?

As I reflect on how I felt when I started—what cognitive burden did I feel when I started? What seemed hard or confusing when at the beginning?

What emotions did I feel about starting? Did the task or skill feel overwhelming? Was I afraid that I would never learn it, that it was too hard, or that I would be judged by others?

2)      Noticing

How do I feel about that task or skill now?

What emotions do I feel as I engage in the task now?

How hard is it to execute?

As I reflect on where I started versus where I am now, what emotions come up? Pride? Satisfaction? Or perhaps anger or impatience, feeling that I have much more distance to go?

3)      Action, based on “Proof of Concept”

If this process of

1) accepting difficult emotions;

2) building a system; and

3) practicing the system

over and over worked for me before, what is another area of my life that I can apply a blueprint that has already worked for me?