Investing might be the final boss of emotional self-mastery. Few things in life have as much potential to make us feel regretful, unsteady, or just plain stupid on a daily basis.

Why is that?

Investing Is Hard Because You Get to Not Just Be Wrong, but 10x Wrong

Investing (separate from money generally) brings up several difficult emotional patterns. Let’s walk through them:

1)      You aren’t just wrong, you’re 100% wrong

In most areas of life, being “right” or “wrong” is somewhat obscured. We might take a new job, and after working there for a year, realize that it’s not a good fit and end up quitting or being fired. We might say that taking that job was a “wrong” decision, but in reality, there were probably some benefits that we got from it. Even if wrong, it’s hard to be “100% wrong” about something like this.

By contrast, in investing, when we’re wrong, we’re 100% wrong. That’s because there’s only one measure of success in investing, and that’s the return we get on the investment. If we buy a stock, and a year later it goes down, we have been objectively, 100% wrong about that stock over that time period.

This leaves no place for our ego to hide.

2)      You aren’t just wrong, you’re wrong every day

Being wrong feels bad. Being wrong and someone reminding you about it constantly feels worse.

Imagine that you and a friend are taking a road trip across the country, you are driving while your friend is taking a nap, and you miss an exit and drive 200 miles in the wrong direction. Most friends, upon waking up and recognizing the situation, would realize you are upset and not make more than one comment about your mistake.

The market is not like that.

The market is like a friend that reminds you, every time you see an exit on the highway, that you drove 200 miles in the wrong direction. Like every 5 minutes. And you aren’t able to punch your friend. You just have to listen to the constant reminders of your mistake. And that might lead you to do rash things, like speeding or day trading options in order to make up for the lost time.

3)      You aren’t just wrong, everyone knows you’re wrong

Because we are right or wrong on any given investment, if we are the type of person that puts our investment ideas out in public, there’s no place to hide when we inevitably get something wrong.

If you read that note, what I thought would happen after the tariffs were announced hasn’t come to pass. It appears that the U.S. economy hasn’t missed much of a beat at all. I made a prediction that at least thus far, appears to have been quite wrong.

And everyone knows it!

(To be fair, it’s still early and what I thought would happen may still come to pass. But at least for now, I have to deal with being wrong.)

4)      You aren’t just wrong, but you know exactly what it would be like to be right

This one is painful.

#2 and #3 trigger anger and shame, respectively, for me. #4 is regret.

With most life choices, there’s no way to know what could have been had we made a different choice at an important crossroads. Had I chosen to pursue a career in law rather than consulting when I finished school, I think my career and life today would be totally unrecognizable to me. I think that, but there’s no way for me to know that.

Had I listened to my friend Veronica (a former equity analyst) about her views on buying Netflix circa 2013, I know exactly how much money I would have made listening to her, or rather, I know exactly how much money I don’t have because I didn’t listen to her.

Contrast that with Veronica saying something like, “you should break up with Amy because she’s bad for you,” I have no idea where my life would be had I listened to her. Might be better, might be worse.

But I know for sure I’m worse off because I didn’t buy Netflix in 2013.

5)      You aren’t just wrong, but you’re wrong when everyone else is right

:(

6)      You aren’t just wrong about something small—you’re wrong about something big

This is the main difference between professional money managers—who are making lots of individual bets—and most retail investors, which are generally deciding between “being in the market” and “being out of the market.”

When we make 20 different bets on individual stocks, getting any one bet wrong isn’t a big deal. But when we have all of our chips on a single bet, getting that bet wrong feels like a fatal mistake.

The most painful example of this I have seen is people who hold on to risky asset positions all the way through a down-cycle and finally capitulate at the bottom. If you are 50 years old and do this, for example, it really does alter your retirement trajectory. This is a case where there’s no way to make up for lost time.

Independent of the mathematical justification for diversification in investing, perhaps more important is the emotional justification. Getting things wrong is a lot easier to digest when it’s not fatal.

Emotional Realism

The bottom line is that if you get into investing (or any other high-stakes endeavor), at some point you will be wrong, and it will hurt.

There is no way around this. When you are fully invested and you see a headline saying that the market was down 8%, you will feel panic. You will feel the impulse to do something rash, and chances are, at some point in your life you will follow through on that impulse and regret it even more later. This is all going to happen.

In part 2 of this series, we’ll talk about the systems and processes that we can use to manage the emotional turbulence of investing. Part 3 will focus on the mindset shifts we can use to become better investors over the long term.

Exercise

Journal on the following or discuss with a friend.

1)      Reflection

Think back to your past on money decisions that you have made that turned out to be wrong:

What emotion comes up as I reflect on my mistakes? Regret, anger, shame, or another emotion entirely?

Were there money decisions that I made that turned out to be good decisions? What emotion comes up as I reflect on those?

2)      Acceptance

As I experience the emotions connected to past financial mistakes and good decisions, what underlying judgments about myself come up?

If I lost money on an investment, does that mean I am stupid, undisciplined, greedy, impulsive, or bad with money?

If I made money on an investment, does that mean I am smart, lucky, or good with money?

Progress comes in recognizing that all of us make both good and bad decisions when it comes to investing. The people who become good investors are the ones who accept that mistakes will happen, and attempt to learn from them.

3)      Action

If I am able to accept that mistakes are guaranteed to happen—that at some point I am certain to be wrong, in a way that feels very painful emotionally—how might I act differently?