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How to Not Invest Emotionally

Conquering your emotions, more than any other attribute is the key to being a successful investor. We therefore have to learn how to avoid emotional investment decision. Managing our expectation is a fantastic tool for controlling these emotions. Let’s set some realistic expectations.

Hello and welcome to this week’s Lockstep Investing Newsletter.

We have an exciting newsletter this week, as we discuss the following:

  • How to Not Invest Emotionally: Perhaps the number one thing standing in our way to our investing success is our emotions. This week, we discuss how managing expectations can help us control our emotions better.

  • Lesson Learned: We learn from the genius of Charlie Munger as he teaches us about “The Psychology of Human Misjudgment”.


Let’s dive in!


Investing is hard and the best way to improve your own investing is through others. So, under “Investing Chronicles”, I’ll share my learnings from my 18+ years in the stock markets.

Last week, we discussed the journey we’re embarking on - searching for high-quality businesses where others are not looking. We laid out a set of principles to guide us. If you missed last week’s newsletter, “5 Fundamental Principles for Better Stock Analysis”. There will be exceptions to these principles, but sticking to these five guidelines will greatly increase our chances of long-term success.

But before we can begin, we need to discuss the most essential aspect of investing:

Managing Your Emotions When Investing

“Individuals who cannot master their emotions are ill-suited to profit from the investment process”

Benjamin Graham

Investing is difficult because it involves our hard-earned money, and when it comes to our money, we are naturally emotionally involved. It is, therefore, imperative as investors to be aware of this and not allow these emotions to influence our decisions because this is a recipe for disaster.

One tool we have at our disposal is to manage our expectations.

My experience has taught me that emotions overtake our decision-making when our expectations are out of line with reality. It is akin to an amateur golfer who starts his round of golf with the expectation of playing as well as the professionals he watched on TV the night before. It is almost guaranteed to be a bad round of golf, with the golfer leaving frustrated.

Let’s not be that way when we invest!

Let’s not be that way when we invest! Instead, let’s set some expectations for investing before we even begin.

1. Finding Exceptional Companies is Challenging

If it were easy to find exceptional companies, everyone would do it. If everyone were doing it, these exceptional companies would all be valued at fair market prices, making our efforts futile.

So, our first expectation is that it will not be easy to find extremely high-quality businesses that we can hopefully hold for the rest of our lives. My goal is to find 10 such companies; for now, I believe I have discovered 2 after 2 years of searching. The point is that we won’t find these companies overnight, so we need to be patient.

Expectation 1: We must be patient in searching for exceptional companies.

2. Long-Term Potential Takes Time to Unfold

Just because we’ve found great businesses doesn’t mean we should expect immediate rewards.

Take the St. Joe Company (JOE), which I discussed in “Economic Moat Company Examples”. JOE’s value lies in its land, which sits at cost on its balance sheet. This land was purchased decades ago, so we know it’s significantly undervalued. Only once the land is developed will this value be unlocked.

The company owns 168,000 acres, so developing this land will take decades. I, therefore, expect that JOE will take many years to reach its potential. If I went into this investment expecting the market to realize the company’s true value overnight, I would get frustrated quickly.

Expectation 2: We must be patient when waiting for these businesses to return value.

3. We Won’t Be Right All the Time

Even legendary investors like Warren Buffett have made most of their wealth from just a handful of companies. Since we strive for similar success as the maestro, we must acknowledge then that he has made numerous investments that didn’t work out.

Mohnish Pabrai, one of Buffet’s disciples, aims for a 60% success rate; I’d be happy with 50%. Setting this expectation prevents us from putting all our eggs in one basket or taking too large a position in just one stock.

Fortunately, if we find quality businesses that can compound in value, then being right 50% of the time means we can still make a lot of money.

Expectation 3: Expect to be right only some of the time.

4. You Will Be Wrong

Expecting not to be right all the time prevents us from being overly aggressive when we buy into a company. Expecting to be wrong keeps us humble after we make the invest.

Even if we find what we believe to be outstanding businesses, we will make mistakes. Expecting to make mistakes helps us remain honest and humble so that we can acknowledge our mistakes.

It’s not easy to spend 40+ hours researching a company only to uncover information that disqualifies it as an investment – the instinct would be to dismiss this information and proceed. It’s even harder to research a business for 80+ hours, invest in it, and monitor it for 6 months, only to see your investment thesis fail to materialize.

You have to be able to let go when you realize your mistakes because if you fail to admit when you are wrong, you are going to lose a lot of money

Expectation 4: Expect to be wrong, so don’t lose money when you are.

Invest Only What You Don’t Need

To manage our expectations, it is essential, in my opinion, that you are in a position to invest for the long term.

There is no point in using your savings to invest in 10 exceptional businesses if you need those savings to fund your life. You will constantly have to sell without benefiting from the long-term compounding. It is also pointless to invest the money if you need it a year or two later to buy a house, a car, or whatever you are saving for.

Equally important is not to invest everything you have to the point you can’t sleep at night when your portfolio loses 10%, 20%, or even 30%.

The ideal scenario is investing money, which you can almost forget, allowing it to compound year after year, rather than sitting then anxiously watching every up and down tick of the share price.

Closing Thoughts

Investing isn’t easy because it involves our hard-earned money, resulting in us making decisions based on emotions.

But if we invest ONLY money that we are happy to leave for the next 10, 20, or 30+ years and ensure our expectations align with an investing reality, in that case, it will be far easier for us to control our emotions and, therefore, succeed.

So remember:

  • Invest Only What You Don’t Need: Ensure you can afford to leave your investments to grow over the long term without needing to sell prematurely.

  • Be Patient in Your Search for Exceptional Businesses: Recognize that finding high-quality companies takes time.

  • Be Patient While Waiting for These Businesses’ Values to Unlock: Understand that it may take years for a company’s true value to be realized.

  • Expect to Be Right Only Some of the Time: Accept that not all investments will be successful.

  • Expect to Be Wrong, So Don’t Lose Money When You Are: Acknowledge mistakes and adjust your strategy to minimize losses.


There is no faster way to learn about investing than through the Greats. Here, I share lessons from the best investors and thinkers.

This week, we discuss how managing emotions is crucial to long-term success. This aligns well with the wisdom shared by Charlie Munger in his famous speech, “The Psychology of Human Misjudgment” where he delves into the cognitive biases and psychological tendencies that can lead to poor decision-making.

Setting Expectations to Reduce Our Biases

Munger was a big believer in the power of incentives. In his speech, he highlights the profound impact of incentives on human behavior, known as the Reward and Punishment Super-Response Tendency. People respond intensely to incentives, often leading to irrational decisions.

This understanding is vital, as incentives impact market behavior, leading to distorted valuations of companies. We, therefore, cannot let the market’s irrationality dictate our decision-making.

The Liking/Loving Tendency and Disliking/Hating Tendency emphasize how personal biases can influence investment decisions.

We might become overly attached to a stock, especially when we have spent hours researching the company. Similarly, we might be critical based on our biases, so we avoid researching a company entirely. Recognizing this, we must strive for objectivity, ensuring our judgments are based on data rather than emotional attachments.

Munger also discusses the Doubt-Avoidance Tendency, where people make quick decisions to avoid uncertainty. This ties into our expectation that finding exceptional companies is challenging and time-consuming. We must resist the urge to make hasty decisions and be patient in our search.

The Inconsistency-Avoidance Tendency highlights our discomfort with conflicting information, which can lead us to ignore essential data that doesn’t fit our preconceived notions. As investors, we must embrace a holistic view, integrating all relevant information even if it challenges our initial thesis.

Social-Proof Tendency underscores the influence of others’ actions on our decisions, leading to herd behavior, where we might follow the crowd instead of conducting independent analysis.

By setting the expectation that we won’t find exceptional companies overnight and that once we find them, it will take time for our investments to play out, we can avoid the pitfalls of following market trends mindlessly.

Overoptimism Tendency and Excessive Self-Regard Tendency remind us of the dangers of overconfidence in our abilities and outcomes. Munger emphasizes the need for humility and realistic expectations, acknowledging that even legendary investors like Warren Buffett have made mistakes.

This ties into our expectation that we will be right only some of the time and our readiness to adjust when we realize we are wrong.

Finally, Munger’s discussion on Deprival-Super Reaction Tendency and Stress-Influence Tendency underscores how loss and stress can lead to poor decision-making.

By investing only money we don’t need for immediate expenses, we can better manage stress and avoid rash decisions driven by short-term market fluctuations.

In conclusion, Munger’s insights on human misjudgment allow us to better understand the psychological tendencies that can derail our decisions. By managing our emotions and setting realistic expectations, we can navigate the complex world of investing more effectively.


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