Do You Have A Money Mind?
Do You Have A Money Mind?
By THE INVESTOR
During this year’s Berkshire Hathaway annual meeting, Warren Buffett discussed the importance of his eventual successor as CEO having ‘a money mind’:
“People have to have a money mind. They can be very smart but make very unintelligent money decisions; their wiring works that way…
A money mind will know what needs to be done.”
Though I was in attendance, the importance of this commentary didn’t register right away. The more I thought about it, however, the more I realised it’s a great mental model for evaluating your financial skill set, as well as those of others such as fund managers and financial advisors.
We all know otherwise well-educated people who make dumb money decisions. That person might even be you from time to time, and I’m certainly in that camp.
Indeed, in a moment I’ll share why even financially-savvy people may not always be in the right ‘money mind’ state.
Putting your mind under the microscope
So, what is a money mind and why should it matter to you?
A money mind should:
1. Understand opportunity costs
Put simply, opportunity costs measure the gains you’ve forgone to make another choice.
Let’s say you choose to attend one university over another. Since you can’t attend both simultaneously, your opportunity cost is what you would have benefited by attending the other school.
As investors, we face opportunity cost decisions all the time, whether we recognize them or not. Cash or shares? Bonds or property? Company XYZ or the FTSE 100?
A money mind will acknowledge his or her objectives and time horizon, and balance those with current market opportunities.
For an investor with a 30-year time horizon, for example, the potential opportunity cost of holding cash is rather high when considering that the stock market’s returns over rolling 30-year periods have been consistently positive.
2. Have high emotional intelligence
Warren Buffett also famously quipped that:
“Success in investing doesn’t correlate with I.Q… Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”
There are four critical aspects of emotional intelligence, according to Travis Bradberry and Jean Graves in their book Emotional Intelligence 2.0.
These four aspects are: Self-awareness, self-management, social awareness, and relationship management.
As investors of our money or someone else’s capital, we must be able to recognize our biases (self-awareness), be able to act at times against those biases (self-management), understand the emotions of other investors (social awareness), and balance our emotional state with theirs (relationship management).
These requirements are a tall order, especially when we’re facing outside stressors in our personal lives.
To continue reading, please go to the original article here: