Emotion Picture: Let’s Talk About Keeping Emotions Out of the Investment Process…

You cannot have a good strategy without good behaviors, like emotional discipline.

“Only when you combine sound intellect with emotional discipline do you get rational behavior.” – Warren Buffett

Have any of you let your emotions get in the way of making a better decision?

Whether the situation was big or small in significance, I imagine the answer is “yes” for everyone.

Regardless, our point is that emotions can affect the way we make decisions.  And when it comes to investing, the same concept applies.

For our discussion today, we would like to review the impacts of emotions on the investment process and our ability to effectively execute a strategy.

Strategy and Emotions

So how do emotions apply to strategy and what part do emotions play in determining a good strategy? 

First, a strategy at the most basic level, according to Richard Rumelt, is “a choice” related to the “application of strength against weakness, or strength applied to the most promising opportunity.”   

In order to execute, a strategy requires resources, processes, and people.  To successfully execute, you need a good strategy, which is made up of better information, better analysis, and better behaviors.   

That’s right, the last part of a good strategy is behaviors.  So, I think you all can probably guess where we are going with this.

You cannot have a good strategy without good behaviors, like emotional discipline.  For the sake of our argument, let’s focus on how emotions apply to the ability to execute an important requirement of our strategy, the real estate investment process.

Emotion as a Liability to the Investment Process

If you are not disciplined with your emotions, they become a liability to the investment process, and, in turn, a liability when attempting to successfully execute a strategy.   This is deemed a liability because without discipline, your decisions are guided by emotions rather than the objective nature of facts.

We are aware that emotions are natural.  We are humans after all.  Emotions in our everyday life are an expression of who we are and what we value. 

We are not saying that we aren’t supposed to feel emotions, and we certainly are not saying that CF Capital will never show emotions during our investment process.  However, we are saying emotional triggers can be recognized when circumstances arise, which gives us the chance to handle our behaviors accordingly.

The circumstances when emotions may become a liability come in a wide variety.  Also, every person handles emotions in their own way, so there are no perfect general rules of thumb. 

With that said, we believe the best way to discipline your emotions is to really understand the potential triggers that cause a case where you get lost in your own emotions.  In doing so, you can minimize how much negative impact your emotions have within your investment process.

Examples of Triggers

Lack Self-Awareness - Do you tend to be a negative person and find all the weaknesses in a deal or circumstances in general? Or does your positivity blind you from potential risks? How do you handle setbacks? Are you someone who has a low emotional boiling point?

Succumbing to the Forces of FOMO - Do you feel a need to immediately jump into real estate investing because you missed a “great opportunity?” Do you find yourself saying, “I’m not expanding my portfolio fast enough”?

Investing with Your Ego - Do you personally tie your self esteem to the value of your investments? Are you comparing your investment success to others? Do you find yourself saying you’re better than other investors and you can handle riskier investments?

Misunderstanding Growth - Do you understand the difference between controlled, steady growth and rampant growth? Steady growth can be maintained without destroying the integrity of your systems and allowing you to stow away enough cash for a rainy day, improve systems, and strike when a good deal appears. Or are you driven by the latest “game changing” fad and are you willing to risk it all for a short term gain?  

(check out related ELEVATE podcasts with Lisa Feldman Barrett, Marc Brackett, and Dr. Jud Brewer).

Looking Outward - Are you investing in a given market because Fred down the street recommends it? Do you know Fred’s investing goals? Is Fred down the street following the same investment criteria as you are?

Thinking Real Estate Investing Solves Everything - Do you believe investing in real estate will help you solve your personal problems? Are you telling yourself the grass is greener in real estate investing because you can run away from your problems? Do you think you won’t have to work anymore once you begin investing in real estate?   

Closing Thoughts

Keep in mind the things that we can control and the things we can.  We can’t control the market or everything that happens to an investment property, but we can control how we react to those situations. We can’t control that the human life is filled with a myriad of emotions, but we can control the way we behave based on being emotionally intelligent and separating perspective from raw emotions. We remain committed to making wise, long-term investment decisions based on data and principle, not how we feel in the moment. We encourage you to proceed with investing amongst your own sea of emotions wisely!

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