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.