The Money Game by Adam Smith (George Goodman) is one of my favorite investment books of all-time.
The book was originally published in 1968, but it’s still more than relevant for investors today because it’s a study of behavior and human nature on Wall Street.
Human nature is the one constant across all market environments.
The quote I always come back to from this book is, “The stock doesn’t know you own it.”
Here’s the entire passage for more context:
A stock is for all practical purposes, a piece of paper that sits in a bank vault. Most likely you will never see it. It may or may not have an Intrinsic Value; what it is worth on any given day depends on the confluence of buyers and sellers that day. The most important thing to realize is simplistic: The stock doesn’t know you own it. All those marvelous things, or those terrible things, that you feel about a stock, or a list of stocks, or an amount of money represented by a list of stocks, all of these things are unreciprocated by the stock or the group of stocks. You can be in love if you want to, but that piece of paper doesn’t love you, and unreciprocated love can turn into masochism, narcissism, or, even worse, market losses and unreciprocated hate.
If you know that the stock doesn’t know you own it, you are ahead of the game. You are ahead because you can change your mind and your actions without regard to what you did or thought yesterday.
Once you start to take the market’s movements personally you’ve already lost.
The market is never out to get you. The Fed doesn’t have your portfolio in mind when setting monetary policy. The market doesn’t have a vendetta against you whenever you lose money or miss out on an opportunity for profit. When you personalize the market’s moves, you fall into the trap of trying to be right rather than trying to make money.
When you take things personally, your first instinct will be to blame others for losses instead of owning up to your own mistakes or the simple fact that not every investment strategy is going to be a winner at all times. Trying to be correct all the time switches your mindset from process to outcomes, which only increases your stress level.
Constantly worrying about outcomes that are completely out of your control, especially in the short term, is asking for trouble from Mr. Market. It’s bad enough that investors get dinged in their pocketbooks when they take losses. Don’t compound the issue by letting your ego make things far worse.
There are no style points when investing, so there’s no reason to feed your ego. When you become preoccupied with the fact that you sold a stock too soon or didn’t buy early enough it’s easy to look for someone to blame. But once you try to assign blame to anyone other than yourself or the random nature of the markets at the time, you’re allowing emotions to take over. That’s when mistakes occur.
You have to invest in the markets as they are, not as you wish them to be. When something goes wrong in either the markets or your portfolio, the problem is not the markets. It’s your perceptions and how your reactions are affected by those perceptions.
Learning how to lose money is actually much more important than learning how to make money in the markets because losing is inevitable.
Investing is not as much about your actions as it is about your reactions and how they affect your thought process.
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Part of this post is a passage from my first book A Wealth of Common Sense. Thanks to Investment Books for posting this passage on Twitter recently as a reminder.
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