I’ve written many articles on the rational analysis of a stock’s financial fundamentals, but the stock market is run by humans, not computers, so all the rational analysis in the world won’t guarantee that you will make any money over the short-term.

Emotion Is an Investor’s Enemy

For long-term investors, waiting a substantial period of time for the marketplace to turn rational would work out fine in the end, but all too often even self-proclaimed “long-term” investors get influenced by the short-term passions of the stock market and abandon their value-based investment approach to chase emotional trends just in time for the emotions to run their course and then reverse. Getting whipsawed through frequent emotional trading is a sure-fire way to financial ruin.

No doubt about it, investing in the stock market can be maddening. Understanding human emotion — both the irrational forces that influence the market as a whole and one’s own emotional weaknesses — is just as important if not more important to successful investing than numbers-based financial analysis.

Behavioral Finance

The study of human emotion in financial markets — formally known as “behavioral finance” — has been around since the 1970s, but for a long time it remained the exclusive province of academics like Daniel Kahneman, Amos Tversky, Richard Thaler, and Robert Shiller. Over the past decade, however, the study of behavioral finance has become a mainstay of investment professionals as well.

10 Rules of Happiness

One of the strongest adherents of behavioral finance today is a man named James Montier, author of many books on the subject, the latest being The Little Book of Behavioral Investing: How Not to be Your own Worst Enemy. I’ve followed Mr. Montier for many years ever since he worked on the global investment strategy team at Dresdner Kleinwort Wasserstein in London and, more recently, at the Boston-based asset allocation firm Grantham, Mayo & Van Otterloo. 

For me, he really became important in 2004 after writing an incredibly unconventional piece — for financial advisers anyway — on happiness. How many investment advisers do you know provide their clients with the following advice?

1. Don’t equate happiness with money.

• People adapt to income shifts relatively quickly; the long lasting benefits are essentially zero.

2. Exercise regularly.

• Taking regular exercise generates further energy and stimulates the mind and the body.

3. Have sex (preferably with someone you love).

• Sex is consistently rated as among the highest generators of happiness. So what are you waiting for?

4. Devote time and effort to close relationships.

• Close relationships require work and effort, but pay vast rewards in terms of happiness.

5. Pause for reflection, meditate on the good things in life.

• Simple reflection on the good aspects of life helps prevent hedonic adaptation.

6. Seek work that engages your skills; look to enjoy your job.

• It makes sense to do something you enjoy. This in turn is likely to allow you to flourish at your job, creating a pleasant feedback loop.

7. Give your body the sleep it needs.

8. Don’t pursue happiness for its own sake, enjoy the moment.

• Faulty perceptions of what makes you happy may lead to the wrong pursuits. Additionally, activities may become a means to an end, rather than something to be enjoyed, defeating the purpose in the first place.

9. Take control of your life; set yourself achievable goals.

10. Remember to follow all the rules.

Wow. This is deep philosophical stuff and I believe it would be well worth it for each and every one of us to spend some time over the weekend pondering these 10 rules of happiness.

I know that I don’t currently follow all of these rules and would definitely benefit from adhering more closely to them. Montier himself would probably admit that he doesn’t adhere to all of them. Anyway, they’re something to strive for. I searched the entire InvestingDaily.com website for the word “happiness” and it came up only five times, three of those times in articles I wrote. After today, the number of times happiness is mentioned will increase by one more.

We sometimes forget that investing is a means to an end and not an end in itself. The means is making money, but the end is freedom and security for ourselves and our families. If life has any meaning, happiness is it, so I plan to take the concept of happiness more into account in my future writings. To get started, this weekend I’m going to take Woody Allen’s advice in the 1986 movie Hannah and Her Sisters and rent the 1933 movie Duck Soup by the Marx Brothers.

All of us at Investing Daily wish all of you a wonderful holiday season and the happiest of New Years.