How Opinions Affect Your Wealth

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U.S. Navy test pilot Alan Shepard became the first American in space on May 5, 1961, when he piloted the Mercury spacecraft Freedom 7 on a 490-kilometer (300-mile) 15-minute suborbital flight. I imagine that during the selection process, Alan Shepard had a lot of questions for NASA’s engineers and scientists. What if, in response to Shepard’s questions regarding an event of this magnitude, these scientists and engineers offered their opinions and expressed their emotions instead of offering hard data, numbers, and calculations?

What if Shepard heard the scientists spouting things like the following?

“I’m not exactly sure how to answer your question, but I have a hunch you won’t explode before reaching space.”

“I wasn’t really confident about the success of this trip yesterday, but today I’m feeling a little bit better.”

“I’m not exactly sure why the thermal panels on the Freedom 7 will hold up upon reentry, but if Dave and Barb say it’s going to be ok, I guess I’m on board too.”

Would you base life-or-death situations on someone else’s opinions, emotions, or hunches? Then why would you entrust your wealth to others’ opinions or sentiments? But when investors invest in the stock market, they are doing exactly that. 

Most stock investors are not rational when making investment decisions. They do not analyze facts, data, or metrics when making buying and selling choices. Instead, they are controlled by emotion and sentiment, which becomes contagion and spreads like wildfire, affecting the market as a whole. So, even if you’re a rational decision-maker, your sound judgment will not save you from the herd behavior that can overtake the markets.

Most wild swings in the stock market are not based on any real economic rationale. Instead, they’re typically triggered by a wave of investor overconfidence or overwhelming fear. It’s how bubbles develop and, eventually, burst. It’s such a common phenomenon that a whole branch of psychology is dedicated to it. Behavioral finance is the study of investor decision-making and how emotions and sentiment play into these decisions. Basically, it’s the study of why investors make irrational investment decisions.

One of the prevailing themes of behavioral finance is that investors, in general, base their decisions on behavioral biases that put common sense and judgment in the back seat. Instead of weighing facts and crunching numbers, investors often let their opinions, sentiments, behavioral tendencies, and biases dictate their decision-making.

Daniel Crosby, author of The Behavioral Investor, states in his book that “too many investors neglect their process and get overly excited by a stock pick they read about on their favorite financial website, or, probably worse, that they hear about from a friend or someone they respect. They don’t do their own full diligence and wind up getting lucky or burned. (“You can be right and still be a moron” for making a poorly thought-through decision, according to Crosby.)”

The problem with behavioral investors is that they can ruin it for everyone else. Once the herd takes over and an ensuing stampede leads to a market crash, no investor is safe—not even the rational ones.

It’s no secret that ultra-wealthy investors rely on passive income to build their wealth. Passive income is what allows them to make money in their sleep, and multiple streams of passive income that can be reinvested are how these investors are able to compound wealth and accelerate the timeline for achieving financial freedom.

Passive income is why smart investors are drawn to cash-flowing real estate and investments in income-producing private companies (i.e., private equity). And to generate passive income, savvy investors will often partner with seasoned experts by making investments in their companies with an expectation of return. And to generate multiple streams of passive income, these investors may team up with multiple investment partners. However, smart investors are selective about who they turn over their capital to. They won’t trust their wealth to just anyone, especially anyone who bases their investment decisions on opinions, sentiments, or hunches.

Smart investors take emotion out of their investing decisions. It’s all about the numbers and data for them. They’re guided by analysis, due diligence, and a religious adherence to numbers, math, facts, figures, and metrics, and they will only partner with others with the same mentality.

Are you entrusting your wealth to a stock market that’s driven by emotion and sentiment?

Like an astronaut that relies on cold, hard data for the success of a mission and their very survival, why not rely on data for growing your wealth?