All too often I hear from friends, colleagues or strangers “I’ve always wanted to own that stock” in response for the reason they’ve made a purchase. Rarely, if ever, have I heard someone justify a purchase of an investment because of the need for diversification, risk tolerance, asset allocation or the correct valuation for a position to be initiated in.
To many investors or consumers alike the division between what constitutes a need in comparison to a want is blurred. We are in fact a consuming society where businesses, governments, educational institutions and many others in a position of influence attempt to persuade our behaviour so that we will consume a service or product they offer.
Companies spend trillions annually through a complex array of advertising campaigns in the hopes of gaining some advantage in the psychology of consumers; as well as spending large amounts of capital on understanding the psychology of consumers. Their hope is that what they sell will be perceived as having benefits over cost and competition in acquiring it. The protection of brands, trademarks, copyrights, patents or exclusivity rights has never been so competitive based solely on the potential loss of revenues that could be generated in the event that a competitive edge is lost. Even as investors, we’re bombarded with advertising to promote business services, investor relations or investing products (such as trading platforms, mutual funds or ETF’s) in order to gain some advantage against any and all competition.
The importance of this topic relates to directly to the psychology of how we consume, purchase and ultimately use, buy or sell a product, service or investment. As consumers we often buy too many products and as investors we often pay too much for a stock or sell at the wrong time. The questions of “Why did I buy that?” “Why didn’t I sell that?” “Why didn’t I see that coming?” or “How come I always do this?” are important questions to look at. We frequently seek advice from others on our own purchasing habits rather than critically examining our behaviour that led us to that specific decision.
Can understanding the differences between needs & wants help to make us a better consumer or investor? – Absolutely
Is recognizing our own patterns of consumption easy? – Not entirely
The actual definition of a need & a want are as follows:
– Situation, obligation or condition; whether physiological, mental, emotional or spiritual, that requires prompt attention
– Something you have to have; what you can’t do without
– A strong desire, wish or craving for something unnecessary
– Something you would like to have; what you can do without
Both terms can be defined in multiple ways, but for the sake of this post I’ll simply leave them both at that. The important difference between the two is that a want initiates a condition through which an individual is easily persuaded. Often individuals with a choice between something of a need or want are torn in their decision process for choosing one or the other. The need should be the obvious choice, but because of how our psychology towards goods and services has developed over time through the bombardment of marketing, we struggle to identify which holds more importance to us.
The clearest mistake in decision making when determining a need or want can be seen when investors buy a security “at any cost”. Frequently an investor will become so emotionally fixed on a specific stock that they ignore any obvious facts. A large group of investors or institutions will frequently bid up the price of a security in an attempt to get into a position ignoring clear indications of what the stock should be reasonably priced on. This is what I term emotional investing: when an investor or group of investors make buying or selling decisions based solely on their emotional reactions to an investment rather than looking to fundamentals or valuation as a trigger.
Eliminating emotion from investing is not easy; even the best of us can be captured into this behaviour when we allow ourselves to be. But here is where the importance of implementing structure into your investing behaviour will benefit your exposure to risk. Whether you use rules (such as me), goals, habits, general principles or some other discipline in your technique; structure has the ability to help you focus on what’s really important with an investing decision. That’s the difference between a need and want: although you might want to buy a stock, having some disciplined approach will hopefully allow you to decide whether that investment is needed in your portfolio or not. It’s really a gut check to make sure you have all areas covered so that surprises will be minimized to the downside.
Another important area neglected routinely is patience. When you want something, very few people have the discipline or patience to wait for the right opportunity. That might mean waiting for a sale, a more opportune time to enter a position in a stock or simply waiting for the right conditions in order to take advantage of an opportunity. Too often investors or consumers will kick themselves in the butt because they jumped the gun too early and made an ill-advised purchase before knowing all the facts. Our psychology as consumers (and possibly through evolution) is to take advantage of opportunity when it presents itself. If we don’t, there’s always the possibility that another situation may put us in a position where we have to give up more in order to gain the same benefit.
Stores frequently take advantage of this mentality when they hold “BLOW OUT” sales or “DOOR CRASHERS”. The perceived incentive for shoppers to buy early and often is that there might not be any product left if you wait until another time. In fact, experience has shown quite often that waiting will often yield an even better opportunity through a new sale or updated model of a specific product with more features for a better price.
All of these points centre on the behaviour of allowing emotion to make the base for purchase decisions. Once you allow emotion to become incorporated into your decision-making process, it’s both difficult and often unconscious in overcoming. As an example: from time to time we can all admit to enjoying the ride of watching an investment rocket up in price. Yet in contrast we feel sick, disturbed or disappointed when the same investment plummets into oblivion. The emotional component of how we react to each likely will be different if the investment was a need or want. A need is something essential that we’re required to have in the portfolio for any variety of reasons. If the price goes downwards over time, it was never a luxury to own in the first place so we’re more satisfied hold onto it until a better replacement comes along. A want is a luxury that we could have spent on another need or better opportunity; it creates an emotional response in regret or excitement because an investor will neglect to pay attention to fundamentals and instead focus on the emotional reinforcement they get from the activity.
For my own practice – I tend to be cheap and frugal in my purchasing habits. I like deals, do extensive research and have the patience to wait for what I want. My investing strategy is even designed around eliminating emotion from my decisions. Occasionally I do become confused between a want and need (I’m far from perfect), but for the most part I’m able to discriminate with confidence between the two.
The next time you begin to analyze an investment, pull up the execution order or get excited over the prospect of value in a declining stock…ask yourself if the purchase is a legitimate need or a frivolous want. Often there are better opportunities when patience is added to your decisions. You might get lucky or be fortunate to secure a position in the short-term, but over the long-term acknowledging both needs and wants in your purchasing decisions may go a long way to securing more prosperity in your investing activities.