I just finished Ego is the Enemy by Ryan Holiday, whose work has become extremely influential in the worlds of business and sports. He is one of those college dropout prodigies that went on to amass great success—first as a media consultant, then as an author. In this book, Holiday cuts straight to the heart of how our egos get in the way of success.
Holiday makes great points throughout the book, but one section from the introduction encapsulates his central thesis: “We can seek to rationalize the worst behavior by pointing to outliers. But no one is truly successful because they are delusional, self-absorbed, or disconnected.” As it relates to money, this statement plays out in two different areas: spending and investing.
I have said before that the purpose of money is to enrich your life. You should maximize the happiness that each dollar can bring you. Instead, we tend to spend money on what makes others happy. For example, if your neighbor buys a new Porsche, he’s the outlier—spending money on an exotic car is not a good investment, so don’t buy one out of jealousy.
On the other hand, if you’ve wanted a Porsche your whole life and finally reached a place where you can easily afford one, then buy it guilt free. It would be delusional to think that everyone of a certain status deserves a Porsche, but if you are self-aware enough to understand why you are buying the car and know it’s just for you, then you can indulge yourself and know that you’re not just giving into ego.
With investing, it’s hard for people to accept that, like most, they are average investors—meaning that market returns is probably as good as they can get. They get excited about the sexier side of investments like using short sales and options, thinking they are the next George Soros or Bill Ackman, but those who find long-term success beating the market are outliers.
They don’t read about the droves of unsuccessful hedge fund managers who have closed their doors in the past few years because that’s not a fun story. The result is what’s known as survival bias, which is a psychological trick that emphasizes those who “survived” over those that did not simply because they are known. So don’t let your ego fool you into thinking you will survive through Mr. Market and become one of the winners.
Ego is the cause of many poor decisions, so it’s always important to keep it in check, especially when it comes to your money.
Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.