Lessons from Whitewater Rafting: Check out why EQ matters more than IQ in investing!

Wednesday: The Independent Investor FROM THE DESK OF MILES EVERSON: Welcome to today’s “The Independent Investor!” From the name of today’s theme itself, we’ll be starting this day with some basic investing tips. We write about these topics because we believe investing is an important activity that helps us achieve true financial freedom. Today, we’ll focus on a simple yet powerful investing discipline. Curious to find out and learn more about this topic?. Keep reading below. CEO, MBO Partners Chairman of the Advisory Board, The I Institute

Lessons from Whitewater Rafting: Check out why EQ matters more than IQ in investing! In May of every year, several investors go on an annual “pilgrimage” to Omaha, Nebraska. The culmination of the journey is Berkshire Hathaway’s annual shareholders meeting, which is considered the “Mecca of the investing world.” Here, Warren Buffett and Charlie Munger, two of the world’s greatest investors, lead the meeting. They also answer questions about business, investing, economy, life, and more. According to Professor Joel Litman, Chairman and CEO of Valens Research and Chief Investment Strategist of Altimetry Financial Research, while many investors were in Omaha during the first week of May 2022, he was on an executive retreat in North Carolina. He enjoyed whitewater rafting with his fellow academics, business partners, and clients. Professor Litman and his team rafted the French Broad River in North Carolina, which flows into Tennessee and joins the Holston River to become the Tennessee River. He says despite not going to Omaha to participate in the investors’ “pilgrimage,” he still felt like he got a hands-on experience of Buffett’s discussion at the shareholders meeting, where the latter talked about navigating “tumultuous waters” in the stock market. As Buffett said: “We didn’t know what was going to happen with the pandemic. We didn’t know what was going to happen with the economy. And everybody thought they’d gotten all kinds of surprises since.” Navigating “Tumultuous Waters” in the Investing World According to Professor Litman, many investors get into trouble with their portfolios not because of the problems in their environment, but because of the lack of emotional control in navigating their environment. The panic selling that’s going on recently is an example of many investors’ lack of emotional control. That’s why Professor Litman says he continues to guide his clients, students, and other investors by teaching them to STAY THE COURSE. One of the ways to do that? By mastering your emotional intelligence (EQ)! EQ is paramount in the world of investing. With a health crisis still looming in different parts of the globe, and the mainstream media selling sensationalism instead of providing good guidance, it’s important that investors know how to control their emotions, especially in times of market volatility. In fact, Buffett and Munger also mentioned in Berkshire Hathaway’s shareholders meeting that EQ is more important than IQ (intelligence quotient) in investing. Why? It’s because your financial decisions are driven by your emotions! So, if you want to improve your financial outcomes, you have to improve your decision making skills… and if you want to improve your decision making skills, you have to raise your EQ. Here are a few ways to boost your EQ: Develop Self-Awareness In Ancient Greece, Greek philosopher Socrates used the phrase, “Know Thyself” as a way to sum up all the philosophical teachings during his time. To use this phrase now means to build on your self-awareness, such as knowing your strengths and weaknesses, and knowing how your emotions are likely to affect your behavior. When applying this principle in the context of investing, ask yourself: “How would I likely react to the next wave of bad news in the financial markets?” “Am I likely to make a knee-jerk reaction that I could regret in the future?” “Is making an investment decision part of my strengths or weaknesses?” Answering these questions will enable you to know yourself more as an investor. Being aware of your emotions is also an important first step to helping you manage them. Build Social Awareness Building social awareness has everything to do with understanding what’s happening around you. How well can you understand others’ emotions and pick up non-verbal cues? How well can you pick up on the investment behaviors of others—both negative and positive? If someone is exhibiting poor investment skills or behavior, are you able to recognize that and not allow yourself to be influenced by it? Also, as an investor, it’s important to be aware of the motives behind every financial news. This will help you control your emotions, particularly fear and greed, and increase the value of your portfolio. Improve Your Communication Skills If you have a financial advisor, it’s important to build trust and communicate with him/her well so you’re both on the same page in good times and in bad times. Never be afraid to ask questions related to your investments. It’s better to ask questions when the financial waters are calm. Trying and sorting things out in the middle of a market correction—especially when you’re panicking—is not good practice. This is because when you’re currently experiencing intense emotions, you’ll less likely make sense of any advice; instead, you’ll end up making financial decisions that are driven by your emotions. According to Professor Litman, if you react in fear or greed to every market surprise or headline in an ad-driven financial media, you will become a bad investor. He says smart investors know full well that panic selling and buying aren’t beneficial for their investment portfolios in the long run. What’s more? He believes staying calm is a prerequisite to staying focused in investing. For him, it’s biologically impossible to be in a fight-or-flight state of mind and still be fully rational and logical. … and just like how one needs to stay calm and focused to row properly in whitewater rafting, you also need to stay the course and avoid panicking to succeed in your investment strategies. Keep these tips in mind! Remember: Your cognitive abilities collapse the moment you start panicking about the markets. This results in bad decisions, investment strategies, and financial outcomes. So, be mindful of your EQ—control your negative emotions, then channel your positive emotions to accomplish what you want! Through this, you’ll not only become a better investor but also a better individual in your personal life. Happy guided investing! Hope you’ve found this week’s insights interesting and helpful. Follow us on LinkedIn. Stay tuned for next Wednesday’s The Independent Investor! In a past “The Independent Investor” article, we talked about active investing and passive investing. Learn more about index fund investing in next week’s article!