Are You An Astute Investor? Financial Advisors' Daily Digest

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By SA For FAs :

Jeff Miller adduces a number of lessons investors can learn from quarterbacks in his latest article on Seeking Alpha. I recommend you read the article and learn from it. For my part, I will note the rationale he states for offering this important advice. I quote:

Investors, advisors and the financial blogosphere should be receptive to every reasonable idea. Instead, most seem to have a stubborn adherence to a particular 'world view.' This influences ideas about causation, potential risks, and what might help investors.

As you can see, what bothers Jeff is that people are closed to the truth. This is very much in keeping with his routine cautioning, found in his analysis of the news and views that matter in " weighing the week ahead " series:

I avoid using my personal preferences in evaluating news - and you should, too!

You've probably read that from him before, and been amused; perhaps you nodded in agreement and maybe you feel it describes you and not others.

But, in truth, evaluating things objectively is a rare skill that takes active training and reinforcement. It is so important that it really demands that we stop and think about how to implement it. That is why Jeff wrote his quarterback article, in which he concludes that investors should develop plans in advance that comport with market reality - just as a good quarterback has a repertoire of pre-planned actions to respond effectively to opportunities. As his very last sentence puts it:

The time to think about this is now, not amid chaotic market action.

I agree, and herewith offer some further thoughts about fostering objectivity in your financial life.

The first step is recognize that there is an unceasing contest between your mind and your heart - that is to say, between your intellect and your feelings. Our culture frequently broadcasts a "follow your heart" kind of message. Know that and be on the alert. When it comes to your investing, and I would say to life in general, it is important that you use your reason to make important decisions. Feelings can change day by day, or minute by minute, whereas an analytic process would arrive at the same decision no matter when you're using it and regardless of how you are feeling.

The first and most critical step is to define things. That's really how you obtain objectivity and rid yourself of preconceived ideas. This is the practical implementation to Jeff's plea: "I avoid using my personal preferences in evaluating news - and you should, too! "

If we're looking at, say, the tax reform bill (and we're not doing that here specifically), we can define what our policy goal should be and ask if the law will bring about this goal, rather than to succumb to our feelings about the politicians who proposed it, toward whom we may harbor sympathetic or antagonistic feelings.

One reason why seeking definitions upfront is so important is that our natural human tendency is to think we (and others we like) are righteous, while dismissing others we don't like as idiotic or demonic. This kind of thinking results in our making mistakes - mistakes stemming from our own foolish prioritization of our feelings!

The next step is to apply the definition we came up with. Think you're financially astute? What is your definition of that? Write it down: "A financially astute person does X, Y and Z." Does that describe you, or do you need to work harder on Y and Z?

Like everything in life, there are levels. Forming and applying definitions take place in the realm of thought. To achieve still greater success, you need to move the thought down to the level of your feelings, until you instinctively feel as your mind instructs. Crises are great opportunities to train your heart.

Let's say you believe that a financially astute person sells high and buys low (among other possible criteria). What's your definition of a high price? Have we reached it? If so, are you selling some of your high-priced assets? Or perhaps "astute" means not making a sale that triggers tax consequences. Have you thought this through and are you acting accordingly? And let's say we experience a market crisis like we had 10 years ago. Will you be prepared to buy low - according to a pre-thought-out plan - or will you allow your feelings of fright to dissuade you from doing so?

If you can succeed at getting your intellect to control your heart, try moving it down to the realm of your limbs, i.e. to the realm of action. Make a plan, and live by the plan. The bottom line is that you can enjoy a greater degree of success in your investing by trying to attain clarity about how you define success and by applying these principles in such a way that you have truly integrated them into your life.

Please share your thoughts on this in our comments section. Meanwhile, below please find links to other advisor-related content on today's Seeking Alpha.

  • Roger Nusbaum distills lessons on risk, behavior and markets via Nassim Taleb .
  • David Merkel, CFA: The pros think we're in a new era .
  • Regarded Solutions: What are you doing with new cash to invest?
  • Kevin Jacques' Monte Carlo simulations look generally positive for the S&P 500 in 2018.

For more content geared to FAs, visit the Financial Advisor Center .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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