Sigmund Freud hypothesized an unconscious mind — a cauldron of primal yearnings that can make both harmless and crucial choices without our awareness. Our unconscious mind can lead us into financial minefields or to the progressive ruin of our portfolios without our ever knowing it. Freud urged us to gain insights into our thoughts and behavior by making the unconscious conscious.
Here are four ways our unconscious works to undermine wealth accumulation and how to overcome its pull:
ADW Capital’s 2020 letter: Long CDON, the future Amazon of the Nordics
ADW Capital Partners was up 119.2% for 2020, compared to a 13.77% gain for the S&P 500, an 11.17% increase for the Russell 2000, and an 8.62% return for the Russell 2000 Value Index. The fund reports an annualized return of 24.63% since its inception in 2005. Q4 2020 hedge fund letters, conferences and more Read More
- Sell your losers and keep your winners
Unconsciously, we strive for status, pleasure and glory. We love to win and hate to lose. But those unconscious drives may derail our plans for wealth accumulation, even as we perceive ourselves as winners. For instance, if you sell a rising stock you feel like a winner. Plant your flag! Take a bow! Walk proud!
You may have just missed out on future gains, dividends, spinoffs, and splits, and, if your stock is in a taxable account, got hit with taxes. And, in any account, fees and commissions.
Most people mistakenly sell their winners to proudly take their profits. Meanwhile, they keep their losers, hoping for a turnaround that never arrives. All for unconscious reasons. A sale locks in an ego-enhancing win. Holding on to a falling stock locks out the pain of loss.
- Winnings are your money, not house money
Unconsciously, we’re reckless with other people’s money. When you lose at the casino, the house keeps your money. But if you win at the casino, emotionally and unconsciously, your winnings still feel like the house’s money. Everyone is more reckless with OPM — other people’s money. A true Freudian might suggest that unconsciously, people feel guilty over any windfall and would be relieved to unburden themselves of guilty money. In any case, that mindset dovetails with the casino’s goal for every winner: keep playing until you lose your money back to the house, and then some. Then lose even more as you chase your losses, trying to break even. The unconscious mind allows you to be reckless with found money.
- Money is all the same
Unconsciously we tag money by its source and keep money in different mental accounts: earned money, profits, lucky bets, inherited or gifted. So we think, “That’s Aunt Bella’s bequest. She loved AT&T so that’s where her money has to stay. But that $5000 bonus I got was a windfall; let’s put it on that hot stock Cousin Dan, our sharp young broker, mentioned at Thanksgiving.”
No, and no!
Letting your unconscious thoughts and wishes determine how to invest is never a prescription for long-term wealth accumulation. All money is fungible. No dollar is different from any other. Money should all be treated the same way: with due care, an awareness of risk and reward, tax consequences, and generational consequences.
- You can only invest what you don’t spend
Freud may never have heard of serotonin, the brain chemical that regulates our self-esteem, but he did perceive how unconscious yearnings for love and status guided the lives of his patients. Not only can our investments be swayed by unconscious strivings, but so can our purchasing decisions. Manipulated by manufacturers, marketers and advertisers, we’re left with less money to invest. That means the growth of wealth is stymied—and you can end up with a bunch of pricey, aging stuff, Citizen Kane-fashion.
One example: parity products, such as top-shelf and off-brand vodka, or luxury cars and their vin ordinaire equivalents. These are functionally and practically identical, but not emotionally. Vodka, domestic or imported, is grain alcohol, regulated by the Federal government and chemically identical save for a trace of methyl alcohol--wood alcohol, a poison—in one Russian brand, discovered on spectroscopy by my organic chemistry professor at Columbia years ago. The premium price of that brand made that taste all the more alluring. My father’s 1993 Lexus ES 300 was little different from the top-of-the-line 1993 Toyota Camry, but the Lexus had the cachet he loved. Lexus is an acronym for “Luxury Edition eXport United States,” but a Freudian might suspect a condensation of the words luxury, sex and statu
Now you won’t impress a client or a date by driving up in a family sedan or ordering no-name vodka, but consider this: Ernest Hemingway, in his observations of the truly rich, observed that the more one has, the less one needs to display.
If you need further proof, consider this: Even after he became a billionaire, Jeff Bezos drove a Honda Accord.