How to be a mindful investor – 11778

8th May 2012

Yet to many of us, this is normal – and gives us the illusion of control in our lives, which can be comforting. But in the climate we're in, with a double dip recession and Europe lurching from one crisis to another, we find ourselves in a complex landscape without a simple solution.

Just as going about daily life mindlessly limits your scope, it also limits your investment strategy. You can't rely on stellar gains from setting up a ‘diverse investment portfolio' and sitting on this for decades – it's time to think outside the box.

Mindful Money asks – Is your approach profitable, and how should it change?

Consider Steve Jobs, or any other great industry success or investment guru, for an example of a dynamic success strategy that steers away from the herd. So much so that Jobs famously wanted only two sets of lavatories at the Pixar headquarters. He believed that if people got up and walked around they would interact more, and in the process they would discover what others were doing and thinking rather than remain ‘stuck'.

However, the problem is that the more decisions we make the less resilient we become, and this goes some way towards explaining the appeal of mindlessness, says Psifi blog.

Mindlessness, as described by Weick and colleagues, is: "Characterized by reliance on past categories, acting on "automatic pilot" and fixation on a single perspective without awareness that things could be otherwise."

Psyfi blog says that the Weick paper, about the dangers of mindlessness in safety critical organisations – can be equally useful for investors. So here are some strategies to avoid sinking into this trap and seeing your profits fall along with this:

Be pre-occupied with failure

Nothing focuses the mind like the possibility of failure – people who worry more about things going wrong are far less likely to lapse into a mindless state. If you worry about failure you are more likely to constantly check your portfolio and investment strategy and take an active approach to making changes where necessary.

Be reluctant to simplify interpretations

Avoid lapsing into default behaviours because that's what you've always done, such as keeping a set proportion of your portfolio in cash and the rest in stocks. "Don't simply rely on default methods of selecting stocks for similar reasons, continually examine your decision making process," says Psyfi blog. So if the climate changes, as it is constantly doing, you'll have the mind to react swiftly if needed.

Be sensitive to operations

If you discover information about a company you're investing in that doesn't add up, then question it – don't just sit back. This particularly applies to the period where we find ourselves, with so many revolts over executive pay. You might react mindfully, say, to chunky pay packets a company is giving to directors compared with paltry sums handed out to shareholders – or another clue that all isn't well with your stock pick.

Learn to be resilient

Build your confidence and resilience as an investor. So if you suffer a setback and a slump in share value, you won't run for the hills – you have to be brave and hold your nerve on the stock market rollercoaster rather than follow the herd and fold if there's a sudden shock.

As an investor, you need to learn the lessons of history. When there is a mass sell-off of assets everything falls – the good assets and the bad. This is a great time to buy quality companies at what could be a bargain-basement price.

"Invest at the point of maximum pessimism" is a famous quote from legendary investor John Templeton, who was one of the last century's most successful contrarian investors. He scooped up shares during the Great Depression.

Don't over-specify your decision structure

Being too rigid and sticking to rules, as well as simplifying your investment style, could put a dent in your portfolio. If the situation changes, what are you going to do? You need flexibility and a mind open to new ideas to maximise your potential for great gains.

So cultivate a mindful state – in life as well as investing. If the rapid evolution of the financial crisis has a lesson for investors it's this – when the cracks start to show consider your position and stay fully aware to make the wise decisions.

 

More from Mindful Money:

How to avoid sabotaging your portfolio

The truth about debt and deficits

Analysing investor reactions

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The Financialist

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