This quote from Buddha succinctly summarizes the all-important psychological component of investing. While the term “mental toughness” is a term more recognizable in professional sports, it is also a critical aspect of a successful investment process. In professional sports, teams get to keep their trophies. Unless you are a little league team from Chicago, championships are timeless. Investors can win one year and lose it all the next, with nothing to show for the prior conquests (except a zero account balance or worse). For this reason, mental toughness is more important for successful investing than it is for professional athletes. Scott Kaufman wrote an article “Are You Mentally Tough?” which appeared in Beautiful Minds, Scientific American Blog Network. In it he identifies some of the main components of mental toughness and why they are important.
Optimism – This is the general expectation that things will work out in the end. Investing in the markets is an act of faith and belief in human potential. Without this attitude, it would be very difficult to stay the course and take advantage of the miracle of compound interest. There is data to back this up. One does not have to a clueless Pollyanna to maintain this attitude. According to Nick Murray, author of the classic book, Simple Wealth, Inevitable Wealth, “The long-term risks of holding stocks do not exist. No 20-year period with dividends reinvested since 1926 shows a negative return.” In other words, this optimism should pay off with the proper time frame. This can be summed up by the wise words of NBA analyst Kenny Smith, “You have to give yourself a chance to fail.” Without this belief, your mental state will collapse at the first signs of trouble. The financial charlatans of the world will be able to ply you with triple-leveraged bear funds and real estate deals so you can purchase your survivalist bunker and miss out on the growth of limitless human potential.
Perseverance – Not giving up when faced with adversity is essential for mental toughness. Though the long-term potential of the markets puts the odds in your favor, the short term is another matter entirely. According to Josh Brown, there are three market dips of 5% or more each year, on average. There is also a more severe correction of 10% or greater every 20 months. Without perseverance, one could easily become part of the behavior gap crew and attempt to build their wealth by buying high and selling low. As Ben Carlson of A Wealth of Common Sense likes to say, “Good luck with that!” Perseverance will enable you to ride out the inevitable peaks and valleys of irrational markets. As Jason Zweig once said, “In investing, only the survivors get paid.” Mental toughness will enable you to actually cash those dividend checks.
Resilience – This is defined as the ability to adapt to the numerous challenges you will face in your chosen field. This trait of mental toughness has often been cited as the key component to success in a multitude of diverse endeavors. For an investor, its importance cannot be understated. The markets are filled with noise designed to distract us from achieving our long-term goals. Falling prey to the noise instead of listening to the signals can be financially devastating. Our brains are wired for negativity. We listen to bad news three times harder than good news! This makes it inherently difficult for us to tune out the noise. Why is it so important not to be influenced by this cascade of chatter? Barry Ritholtz answers this in a way that only he can. He believes this noise is untimely, hypothetical, unusable and distracting; not exactly an all-star lineup for good decision-making. If one is not mentally tough it will be very easy to focus valuable time and energy on destructive subject matters and worthless forecasts. Focusing on things you cannot control, like interest rates, world events, commodity prices, etc., will weaken your mental state precipitously. In the words of Vanguard’s founder John Bogle,” The Stock market is a giant distraction from the business of investing.”
In some ways, being a great investor means ice water should traverse through your veins in lieu of blood. The best of them, Warren Buffet, Howard Marks, George Soros, etc., have this quality figuratively, if not literally. The rest of us just have to be aware of the components of mental toughness. We need to try to correct the habits that will get in the way of this intense focus. If we don’t, we will become what we think: A pessimistic, unfocused, quitter with a low probability for success in any field. If you don’t believe it, just ask Buddha.
