Al­most two decades ago dur­ing my time at Price­wa­ter­house­C­oop­ers I was ex­posed to a train­ing pro­gramme on in­ter­per­son­al skills. It was my first re­al un­der­stand­ing about how peo­ple think dif­fer­ent­ly. The high­light came when peo­ple of the same per­son­al­i­ty type were grouped and each group was asked to de­scribe what they saw. Dif­fer­ent peo­ple look­ing at ex­act­ly the same in­for­ma­tion and in­ter­pret­ing it com­plete­ly dif­fer­ent­ly was an eye open­ing ex­pe­ri­ence.

This un­der­stand­ing has been quite use­ful dur­ing my years of pro­vid­ing fi­nan­cial ad­vice. First­ly be­cause the abil­i­ty to in­ter­pret the same in­for­ma­tion dif­fer­ent­ly is ac­tu­al­ly what makes a mar­ket func­tion. In a prop­er func­tion­ing mar­ket a buy­er and a sell­er would have ac­cess to sim­i­lar in­for­ma­tion, al­beit with dif­fer­ent needs, at a point in time. Some may see the in­for­ma­tion in the mar­ket as a rea­son to buy, oth­ers may see it as a rea­son to sell. The dif­fer­ent views al­low a trade to take place. With­out the dif­fer­ent views there would be no mar­ket.

The dif­fer­ence in views al­so man­i­fests in the re­la­tion­ship be­tween a fi­nan­cial pro­fes­sion­al and the layper­son as a client. It is the com­bi­na­tion of fi­nan­cial train­ing as well as dif­fer­ences in per­son­al­i­ties that re­sults in dif­fer­ences in the way a fi­nan­cial pro­fes­sion­al and a client will ap­proach the same is­sue. Re­solv­ing this dis­con­nect is a big part of the skill of the pro­fes­sion.

Of­ten times a per­son has a pre­con­ceived no­tion of what they want to ac­com­plish and they are seek­ing val­i­da­tion from the fi­nan­cial pro­fes­sion­al. The prob­lem is that many peo­ple don’t want to be con­vinced of an­oth­er course of ac­tion. The rea­son for this is that mon­ey car­ries with it a strong emo­tion­al con­nec­tion. Add to that the feel­ing that al­most every­one thinks that with the right tools they can be­come a good in­vestor and you have a po­tent mix for an opin­ion­at­ed dis­cus­sion.

At one of the stock­bro­ker­age firms that I used to work at I ob­served a cus­tomer who would come in, I would say month­ly, to buy a cer­tain stock in a cer­tain com­pa­ny. The cus­tomer was a pub­lic ser­vant so in terms of in­come brack­et he would be termed “mid­dle class”. At the time of his pass­ing this cus­tomer had a stock port­fo­lio of $13 mil­lion. This was achieved sim­ply from buy­ing a quan­tum of stocks from his dis­cre­tionary in­come month­ly for a sig­nif­i­cant part of his work­ing life.

Dur­ing my time in the in­dus­try I have al­so come across many in­di­vid­u­als with fair­ly sub­stan­tial salaries seek­ing to get their fi­nances in or­der and in­vest. Many of these per­sons de­spite the large salary are un­able to save and in fact have huge amounts of debt as they at­tempt to own the big house in the up­scale area, send their chil­dren abroad to study and gen­er­al­ly live a lifestyle that match­es the Jones’s next door.

The rea­son why a mid­dle class pub­lic ser­vant can end up be­ing bet­ter off fi­nan­cial­ly than an up­per lev­el busi­ness ex­ec­u­tive comes down to their dif­fer­ent re­la­tion­ship with mon­ey and that re­la­tion­ship man­i­fests it­self in their re­spec­tive emo­tion­al con­nec­tion with mon­ey.

Mon­ey has been de­fined as a medi­um of ex­change, a mea­sure of val­ue and a store of val­ue. A medi­um of ex­change means that you can use mon­ey to ex­change it for some oth­er good or ser­vice. A mea­sure of val­ue means that the amount you pay for the good or ser­vice is ex­pressed in mon­e­tary terms.

Fi­nal­ly, a store of val­ue refers to the fact that if you were to hold on­to mon­ey its val­ue should be pre­served over time.

The last point is the rea­son why high in­fla­tion is such an is­sue for a cur­ren­cy as it does not then serve as a store of val­ue and peo­ple will then switch out to oth­er cur­ren­cies.

There is one oth­er point to add to the dis­cus­sion of mon­ey and it is not of­ten you will find this point in a tra­di­tion­al eco­nom­ic text­book. Mon­ey is not just a store of val­ue but it is al­so an ex­pres­sion of your val­ues. How you spend your mon­ey and what you spend it on is an ex­pres­sion of you, it is an ex­pres­sion of the things you val­ue and how you see the world. How you use mon­ey is there­fore a deeply per­son­al ex­pe­ri­ence which is why peo­ple can be so opin­ion­at­ed about their mon­ey.

A com­mon mis­con­cep­tion is the be­lief that fi­nance and in­vest­ing are sim­i­lar. They are not sim­i­lar but rather two very dif­fer­ent en­gage­ments.

Fi­nance may be re­lat­ed to the the­o­ry, process­es and the math as­so­ci­at­ed with mon­ey. In­vest­ing on the oth­er hand speaks to how you be­have with mon­ey.

There are many peo­ple with mon­ey who un­der­stand the tech­ni­cal side of the equa­tion and many in this cat­e­go­ry be­lieve they can in­vest for them­selves and man­age their own port­fo­lio. The say­ing “a doc­tor is his own worst pa­tient” comes to mind.

The fal­la­cy in the equa­tion that of­ten trips many peo­ple up is the be­lief that they can have the emo­tion­al de­tach­ment from their mon­ey to be able to man­age their mon­ey suc­cess­ful­ly for them­selves. In­vest­ing at its core is about man­ag­ing your emo­tions.

We all know the quote from War­ren Buf­fett “be greedy when the mar­kets are fear­ful and be fear­ful when the mar­kets are greedy”. That quote trans­lates in­to “buy low and sell high”. When the mar­ket is fear­ful the emo­tion­al re­ac­tion to fear is “flight” which means to you run away from the fear­ful en­counter. In in­vest­ing that means sell­ing but the ad­vice is to be greedy at that time which im­plies to buy in­to the mar­ket in­stead.

You are there­fore be­ing asked to do ex­act­ly the op­po­site of what your emo­tions sug­gest you should be do­ing. The fact that the ma­jor­i­ty does not suc­ceed in this en­deav­our proves just how dif­fi­cult it is to over­come the emo­tion­al re­ac­tion.

See­ing your stocks rise dur­ing a ral­ly and fall dur­ing a sell off speaks di­rect­ly to the emo­tions of fear and greed. How­ev­er your re­la­tion­ship with mon­ey is much more com­pli­cat­ed than that. Every­day you are faced with ap­prox­i­mate­ly 4,000 ad­ver­tis­ing mes­sages and every one of those mes­sages comes with a se­duc­tive ap­peal to some emo­tion to at­tempt to get you to ex­change a prod­uct or ser­vice for your mon­ey.

On a dai­ly ba­sis you are con­stant­ly fight­ing a bat­tle be­tween emo­tions that are tempt­ing you to open your wal­let. It is your abil­i­ty or in­abil­i­ty to re­sist and man­age your emo­tions, rather than your salary lev­el or start­ing wealth po­si­tion that will de­ter­mine where you end up.

At a na­tion­al lev­el there is a very im­port rea­son why we need to be aware of these re­al­i­ties. If peo­ple’s en­gage­ment with mon­ey is an ex­pres­sion of their val­ues and if their re­ac­tions with mon­ey are based on their emo­tions then that cu­mu­la­tive sen­ti­ment will find its way in­to the na­tion­al eco­nom­ic and fi­nan­cial sta­tis­tics.

Last week I lament­ed the lack of in­for­ma­tion in the pub­lic space for a num­ber of key ini­tia­tives. When the neg­a­tive sen­ti­ment and emo­tions as­so­ci­at­ed with job loss­es and low­er dis­cre­tionary in­come com­bines with the vac­u­um caused by a lack of in­for­ma­tion then fear be­comes the pre­vail­ing emo­tion. You then have the flight or fight re­ac­tion and that cre­ates tur­moil.

From a na­tion­al per­spec­tive the over­all point is this. If we are un­aware of our re­la­tion­ship with mon­ey at the mi­cro lev­el then we are un­able to grasp how it all feeds in­to a macro lev­el re­sult. If we can­not har­ness this re­la­tion­ship to­wards out­comes that are pos­i­tive and healthy then we end up hav­ing to re­ly more on State in­ter­ven­tion in or­der to achieve de­sired eco­nom­ic out­comes. This is not an ap­proach that we can eas­i­ly af­ford. It is log­i­cal to then con­clude that our ap­proach has to change.