Mental Tricks of an Investor

The 2018 Winter Olympics from PyeongChang, South Korea have kicked off, and I’m all about it. Some people are religiously devoted to one sport like basketball or the English Premier League. Me? I just love sports and the Games are certainly no exception.

The Olympics showcase the best of the best doing what seems to be the impossible. For 17 days, we get to see athletes propel themselves to the highest levels of performance. If you’ve missed this weekend’s action. Tune in. Some crazy stuff went down (here, here, here, and here) and more is on the way.

One of the fascinating aspects of sports is the mental game. In the high-pressure arena of Olympic competition, the thoughts that go on between the ears can decide if you make the podium or if you go home empty-handed. I’ll also say that one of the fascinating aspects of investing is the mental game. Let’s dive into how our brains affect our performance both on the field and with our investments.


Alex Hutchinson had a fabulous article (an adaption from his new book: Endure) on how much our thoughts or “mental tricks” can affect performance.

He writes that in 2010 at the Vancouver games Slovenian cross-country skier Petra Majdič, slipped and fell 10 feet during a warm-up run onto a rock-filled creek bed. The pain she felt was excruciating. After dragging herself to a medical tent and being evaluated by a doctor who said that everything looked “OK,” she persisted through her qualifying, quarterfinal, semifinal and final races to take a bronze medal. X-rays afterward revealed broken ribs and a collapsed lung.

Majdič’s story is one of many in the athlete world, but still, each one is an amazing dive into what seems impossible. But how do they do it? New research has started to emerge on endurance and how far one can push themselves. Our brains have much greater control over our actions than what we may have previously understood. That exhausted feeling you get after a race or difficult training session? Turns out it’s mainly just a feeling. Hutchinson explains:

The precise nature of the mind-muscle connection remains hotly disputed today, but most researchers accept the essential point: that the physical manifestations of fatigue—racing heart, elevated core temperature, a rising tide of metabolites like lactate in the blood—merely serve as sources of information for the brain, rather than direct limits on our ability to continue.

Fatigue is our body telling our brain, “Hey, we’re tired.” But that’s a different statement from, “We’ve reached the limit of physical exertion.” It turns out we even have the ability, to an extent, to control this feeling. “If you change your perception of a task’s difficulty,” Hutchinson says, “you can change your actual results.”

There are plenty of examples of this phenomenon. In a 2014 experiment described in the journal Frontiers in Human Neuroscience, researchers led by Dr. Marcora showed cyclists images of smiling faces on a screen in imperceptible 16-millisecond flashes. The exposure boosted cycling performance by 12% over the level recorded with frowning faces projected in the same way. The sight of a smile didn’t lower the subjects’ heart rates or lactate levels, according to Dr. Marcora. Instead, it subtly altered how their brains interpreted those signals, evoking feelings of ease that bled into their perception of how hard they were pedaling.

Eliud Kipchoge, the Olympic marathon champion from Kenya, has sought to self-administer the same effect. Mr. Kipchoge has come the closest to breaking the 2-hour barrier in a marathon, missing by just 26 seconds (in a race in Italy last year that doesn’t count in official records). He deliberately smiled broadly every mile or so during the final stretch. “When you smile and you’re happy,” he later explained to reporters, “you can trigger the mind to feel your legs.”

 Another fascinating “trick” is the power of self-talk:

 A 2016 study by Stephen Cheung, an environmental physiologist and avid cyclocross competitor at Brock University in Canada, gave cyclists two weeks of self-talk training before an all-out ride in a heat chamber at 95 degrees Fahrenheit. Replacing negative thoughts like “I’m boiling” with motivational statements such as “Keep pushing, you’re doing well” boosted their time to exhaustion from eight minutes to over 11 minutes. Most tellingly, it allowed them to push their core temperatures half a degree higher, on average, before quitting.

Hutchinson cautions that this research doesn’t mean that “limits are all in your head or you can simply choose to ignore your brain’s diktats,” it just goes to show the power of the mind and how we can push ourselves into areas beyond what we thought possible. Quite empowering.


The way our brains behave when it comes to investing is empowering, too, but maybe in a different sense. Neuroeconomics or the study of how neuroscience drives investment behavior has taken a larger place on center stage in the realm of investing, and I think this is a great thing especially to an average mind like my own. It sheds light on how much human behavior has an effect on investment returns and that you don’t need superior smarts or IQ to have satisfactory results as an investor. Part of the equation is understanding how your brain works, how it reacts to making money, and how it leads you to make decisions that usually hurt your returns. Just like how understanding your brain can make you a better competitor and boost your performance in a race, understanding your brain can help make you a better investor. The ideas and quotes for this section are from Jason Zweig’s book, Your Money and Your Brain, which I highly recommend.

Everyone knows that you shouldn’t buy high and sell low, or use outrageous amounts of debt to buy investments, but the funny thing is – we do these things even when we know they’re not good for us. Our mind pushes us to do illogical things. Psychology has a huge influence on us as investors especially in these two areas: Greed and Confidence. If we can better understand how our brain functions in these areas, then maybe we can better understand ourselves and create larger returns.

A survey of people who had won at least $1 million playing the state lottery in Ohio found that over 80% of them still play the lottery. Why is this? We all know that it feels great to make money, but actually, it feels even better to anticipate making money. The signal of the potential gain in and of itself can get you excited and get you to play. What happens when you actually realize the reward? Well, the feeling is gone and leads you to search out another potential gain signal.

In 1999 Celera Genomics Group had begun to sequence the human genome. Investors went crazy with anticipation as the stock rose from just above $17 to over $240. In 2006, when the head chief scientist announced that they had cracked the human genetic code, the stock fell 10% that day and over 10% again the next. Crazy.

Why does this happen? There’s this chemical in our brains called dopamine. It’s the pleasure drug that makes you feel good whenever you receive a reward or do something good. This is a great thing because it motivates you to study for a test in order to get a good grade or walk an old lady across the street and receive the satisfaction for doing a good thing. However, Zweig explains, “once you’ve learned what kind of cue can signal a reward, your dopamine neurons no long fire up in response to the gain itself; instead, they will be triggered by the appearance of the cue.” In fact, MRI scans of cocaine addicts who are about to get a fix and people who are hoping for a profitable financial gain – are virtually identical. This isn’t a joke: once you hit it right on a few investments, you could be on par with a cocaine addict.

Bottom line: Your expectation of scoring big will trigger a rush of dopamine and may lead you to make investments based on hype.

In 1965 psychiatrists out of UW asked a group of drivers to rate their most recent drive. Most described their drives as “extra good” or “100%” on a scale of alertness. It turns out the researchers were interviewing these drivers in the hospital because their most recent drive put them there! There is a fundamental belief in each individual human that we think we are better than we actually are. Being overconfident isn’t always bad – it’s how entrepreneurs strike out on their own and form businesses or how I ended up dating and marrying a woman who is way out of my league (at least it worked out for me ;)). Thinking positive can be a game-changer as Hutchinson described above in the context of athletic performance, but outrageous confidence can be perilous for an investor.

Zweig says, “You will never make the most of your investment potential if you think you have far more potential than you actually do. The only way to achieve everything you’re capable of is to accept what you are not capable of.”

Because overconfident investors believe they know what’s going to happen, they are always trading – buying and selling some security. A study done from 1991-1996 found that the portfolios of those who trade most underperform the market by more than 7% per year.

Admitting our ignorance undermines our self-esteem, but it’s a turning point in your journey as an investor. I’ll readily admit that I am not an expert in smart-beta, quantitative investing, long-short strategies, cryptocurrency, or financial modeling. And I’ll admit that I have much to learn when it comes to client engagement, communication, owner transitions, withdrawal strategies, and presentations (the list can extend for a while so I’ll stop while I’m behind). Frankly, I’d rather admit when I don’t know and have more money in the end than pretend to know what I’m doing and have it backfire on my investment returns or on client expectations. As long as you avoid the big mistakes, you only need to get a few things right as an investor to achieve good results.

Bottom Line: We think better of ourselves than what we actually are. If we apply this to investing and make decisions based on overconfidence, we’ll get burned.


In the end, you are going to get caught up in new investments promising high returns, and you are going to believe you are better than you actually are. Our brains are hard-wired for this. So here’s some “mental tricks” to help you get out in front:

  • Invest with rules. Designate how much you are going to save and invest each month and where you are going to put it. Then stick with it. This doesn’t require you to go to Harvard and have 30 years of investing experience. You just need the discipline to follow through.
  • Automate your investment/savings. One of the hardest things to do is save and invest part of the money that is in your checking account. We tend to look at the balance and do impulse buys off Amazon or go out to dinner with friends leaving little to invest/save at the end of the month. The more you have to remind yourself to invest and the more thinking about it you do, the less likely you are to do it. Our brains are cognitive misers and don’t like to work more than they have to. To solve this, have contributions to your 401(k) be automatically deducted from your paycheck or set up automatic contributions to your other investment and savings accounts.
  • Control the controllable. You are not the President, chairman of the Federal Reserve, or the market. Those are outside of your control. You may not like it but neither you nor I have control over what the market does day in and day out. What we can control are our behaviors. You decide how much you want to pay for your investments, you decide what your expectations for returns are (either reasonable or unreasonable), you decide on how much risk you are going to take, you decide when you are going to incur taxes based off what you buy and sell. Focus on those and leave the others to the powers at be.

I’ll finish off with the Olympic events and stories I’m stoked about:

  • Snowboard Half-Pipe – Shaun White (local Carlsbad native!) has an opportunity to redeem himself from Sochi and return to his Flying Tomato-ness.
  • Biathlon – Lowell Bailey and his story of coming out of retirement to compete one last time.
  • Short-Track Speed SkatingMaame Biney
  • Bobsled – if you’re like me and wondered what happened to Sam McGuffie….found him
  • Ice hockey – with the NHL players not participating in the Olympics, this will be the first time since ’94 that the world’s “best” haven’t participated. I’m excited for the overlooked and forgotten to give us a reason to cheer.

Now, here’s what I’ve been reading/listening to:

How to make smarter decisions when you don’t have all the facts (The Learning Leader Show)
The future of venture capital (Invest Like the Best)
The crown jewel of the alternative universe is private equity (The Meb Faber Show)
The reasonable formation of unreasonable things (Collaborative Fund)
It’s not too late (A Wealth of Common Sense)
Is this normal? (Peter Lazaroff)
Lessons from the game: Malcolm Lemmons (A Frugal Athlete)
How to win a high-school debate: talk like a cattle auctioneer (The Wall Street Journal)
The stock market didn’t get tested – you did (Jason Zweig)
NFL draft profile: SMU’s Courtland Sutton is more than just a football player; he’s a finisher (Forbes)
SEC asked to bar brokers from calling themselves ‘advisors’ (AdvisorNews)
You can’t call them ‘Russia,’ but you can call them stylish (The Wall Street Journal)
The three-body problem (Epsilon Theory)