Emotional Discipline

If you're not the most emotionally disciplined person, should you really consider a career dedicated to investing? Now I get that work can be done on this issue to improve, such as being aware of one's biases and working on them, but if your default/nature is one of higher emotional volatility, can that handicap you from having a successful investing career?

Would love to hear some perspectives.

Comments (7)

mtnmaster1, what's your opinion? Comment below:

You got me thinking so I am gonna ramble on for a bit here:

I don't believe I have superior emotional discipline, but I do think I can compartmentalize things quite well (at least the right things...). Admittedly, I am not a portfolio manager, and I think the emotional volatility / stress gets way (WAY) worse as you get to that level, but even from my seat I experience the swings of the market, especially so for the names I am responsible for. Most notably it causes me to question my thesis and the quality/ thoroughness of my work. 

Ultimately, it comes down to conviction, which is something I have struggled with early on, and I think many other analysts will struggle with as well. We are always dealing with imperfect information and probabilities, and you can't put on risk or be effective without strong conviction towards your process and thesis. The problem, obviously, is this business also requires us to be extremely humble and flexible enough to change our opinion when presented with new information. Rarely is new information a black and white scenario of "x" now means you should sell instead of buy. I think a problem I struggled with early on was being great at presenting the facts, the upside/downside, the bull/bear thesis, etc. - but not arguing with conviction for what the trade should be. Having conviction on extremely imperfect information in not always rational markets where probabilities are constantly changing is very difficult - but you can build it over time with enough reps.

Another thing to remember about the work is that this is not an intellectual exercise about proving who is the smartest, it is about making money. When you are in a room arguing a thesis with colleagues, it is very important to not take things personally. Seems obvious enough, but you would be surprised at how emotional some people can get when it comes to this stuff - of all of Dalio's crazyness, his points regarding egos when it comes to this stuff are actually quite good. 

I digressed - ultimately I think emotional discipline can be built over time, and like all things in life it is a muscle that you must work on. If you can see the work for what it is and not tie your entire value system to the musings of the market, you should be ok. If you who are as an individual is constantly tied to the swings of the markets, it can muddy your thinking, erode your conviction, and make you stressed out constantly. 

In conclusion... I have no conviction and am constantly stressed... just kidding!.... sort of  

angrybanana, what's your opinion? Comment below:

Haha thanks for sharing. One of the things I've struggled with is the humility, but I actually suffer from too much of it because my mind tells me there are a gazillion funds, analysts, retail etc etc who are looking at this stock, long or short. Who am I to think that I will be right or that I have this unique insight nobody else has? This is not high school where the standards are easy. This is the market - you have soooo many smart people in it. To think that you can outsmart them or that the work and research I do is somewhat so proprietary that nobody else can do to me feels like cockiness. I'd much rather say you know what, this whole thing is ultimately a luck game with a bit of hussle, but to think that I can come up with super strong conviction and then have the ego to think I'm right and half the market is wrong… I don't buy it. 

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mtnmaster1, what's your opinion? Comment below:

You bring up a good point - I always tell myself the same re: other players in the market etc. I think what works, however, is understanding what game you are playing and being exceptionally good at understanding 1) what is overwhelmingly in the numbers 2) the most important incremental drivers. If you are going for a pod investment style thesis on a large cap name, be cognizant of the fact that a new tegus insider interview or new credit card data is going to be somewhat built into expectations. Edge can come from an underappreciated data source/piece of information, but it is increasingly VERY difficult to really find things like that. So what to do? Well now you are playing an expectations game, and trying to find scenarios where the market has over/under extrapolated that data or focusing on different things. In that circumstance you can use it to your advantage - say a company with a somewhat defensive business model, recently guided down orders because of macro weakness, alt. data and interviews suggest weakness the next few quarters, but you recognize the cash flow generation potential on a more normalized basis, and lets pretend the current overhang isn't company specific. Take the long view and bet on the return to "normalized", looking for an attractive entry that gives you a good risk/reward with limited downside. Its not like those opportunities are a dime a dozen, but they do pop up, especially when volatility increases and macro headlines drive risk on/off days. 

Recognizing that your two interviews with management + a 15 person survey aren't 100p differentiated is important (although sometimes finding the narrative that is underappreciated/overlooked can be part of it), but knowing what expectations you are playing against, what time horizon you want to compete in, what risk/reward you need to target, etc. - all of your process - is where the magic happens. Even then, its not a 100p guaranteed recipe for success, but it tilts the odds in your favor to put up enough ideas that will generate you money. You have to have conviction in your process - or essentially knowing what market narratives you are playing against and where you could be wrong, to tilt the odds in your favor. 

  • Analyst 3+ in HF - Other

"Emotional discipline" or "conviction" or whatever you call it is what leads to blow ups.

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angrybanana, what's your opinion? Comment below:

If it came across as stubbornness, I didn't mean it that wat. What I meant is seeing days like these and still being able to sleep well for a few hours without being engulfed with unfounded fear and stress, which could force you into a suboptimal action.

  • Research Analyst in HF - Other

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