Welcome to another painting with stories piece by our contributor Vitaliy Katsenelson: Edited by TNM
How Emotional Intelligence Can Make You a Better Investor
Your knee hurts, so you pay a visit to your favorite orthopedist. He smiles, maybe even gives you a hug, and then tells you: âI feel your pain. Really, I do. But I donât treat left knees, only right ones. I find I am so much better with the right ones. Last time I worked on a left knee, I didnât do so well.â
Though many professionals â doctors as well as lawyers, architects and engineers â get to choose their specializations, they rarely get to choose the problems they solve. Problems choose them. Investors enjoy the unique luxury of choosing problems that let them maximize the use of not just their IQ but also their EQ â emotional intelligence.
Letâs start with IQ. Our intellectual capacity to analyze problems will vary with the problem in front of us. Just as we breezed through some subjects in college and struggled with others, our ability to understand the current and future dynamics of various companies and industries will fluctuate as well. This is why we buy stocks that fall within our sphere of competence. We tend to stick with ones where our IQ is the highest.
Though we usually think about our capacity to analyze problems as being dependable and stable over time, it isnât. It might be if we were characters from Star Trek, with complete control over our emotions, like Mr. Spock, or who lacked emotions, like Lieutenant Commander Data. This is where our EQ comes in.
I am not a licensed psychologist, but I have huge experience treating a very difficult patient: me. And what I have found is that emotions have two troublesome effects on me. First, they distort probabilities; so even if my intellectual capacity to analyze a problem is not impacted, my brain may be solving a distorted problem. Second, my IQ is not constant, and my ability to process information effectively declines under stress. I either lose the big picture or overlook important details. This dilemma is not unique to me; Iâm sure it affects all of us to various degrees.
The higher my EQ with regard to a particular company, the more likely that my IQ will not degrade when things go wrong (or even when they go right). There is a good reason why doctors donât treat their own children: Their ability to be rational (properly weighing probabilities) may be severely compromised by their emotions.
A friend of mine who is a terrific investor, and who will remain nameless though his name is George, once told me that he never invests in grocery store stocks because he canât be rational when he holds them. If we spent some Freudian time with him, weâd probably discover that he had a traumatic childhood event at the grocery store (he may have been caught shoplifting a candy bar when he was eight), or he may have had a bad experience with a grocery stock early in his career. The reason for his problem is irrelevant; what is important is that he has realized that his high IQ will be impaired by his low EQ if he owns grocery stocks.
There is no cure for emotions, but we can dramatically minimize the impact they have on us as investors by adjusting our investment process. First and foremost, investors have the incredible advantage of picking domains where they can remain rational.
To be a successful investor, you donât need Albert Einsteinâs IQ (though sometimes I wish I had Spockâs EQ). Warren Buffett undoubtedly has a very high IQ, but even the Oracle of Omaha chooses carefully his battles; for instance, he doesnât invest in technology stocks.
Investors have the luxury of investing only in stocks for which both their IQ and EQ are maximized, because there are tens of thousands of stocks out there to choose from, and they need just a few dozen.
Meanwhile, I hope when I go see the doctor, he will tell me, âI donât do left knees,â because the best result will come from a doctor who while treating me will utilize both IQ and EQ.
Disclosure
The information contained in this article represents Investment Management Associatesâs (IMA) opinions, and should not be construed as personalized or individualized investment advice and are subject to change. Past performance is no guarantee of future results. Vitaliy Katsenelson, CEO and CIO, wrote this article. It should not be assumed that investing in any securities mentioned above will or will not be profitable. Portfolio composition is subject to change at any time and references to specific securities, countries, industries and sectors in this letter are not recommendations to purchase or sell any particular security. Current and future portfolio holdings are subject to risk. In preparing this document, IMA has relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources. A list of all recommendations made by IMA within the past twelve-month period is available by clicking here.
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Senior Editor, Digital Manager, Blogger, has been nominated for awards several times as Publisher and Author over the years. Has been with company for almost three years and is a current native St. Louisan.
