The Most Important Thing About Investing

By Jimmy Turner, MD
The Physician Philosopher

The other day I was listening to a WCI podcast where he interviewed Dr.  Bill Bernstein.  Dr. Bernstein, a neurologist turned financial advisor, was asked about the four key areas of investing as made famous by his book The Four Pillars of Investing.  The four pillars are investing theory, history, business, and psychology of investing.  When the White Coat Investor asked Bill which of the four was most important, he didn’t hesitate:

…I would say the psychology of investing. It turns out that human beings are just not wired for finance…we evolved in a state of nature where the risks that we faced were second to second. The flash of yellow and black in your peripheral vision, the hiss of the snake, and it’s a second to second thing, whereas the risks that we face in the modern world stretching out over decades and we’re just not wired to deal with them and that’s really what destroys most people’s ability to execute finance in the long run. So you have to understand just what those reactions are and how to overcome them.

Given the nature of this blog, which focuses on behavioral finance (i.e. the “psychology of investing”), I couldn’t agree more.  When the rubber meets the road, learning how to avoid defeating yourself is infinitely more important than knowing how to invest.

Let’s dive into some examples of the psychology of investing!  Everything discussed below is backed by behavioral finance studies.

More Work Doesn’t Mean Better Returns

Most of our lives tell us that working harder produces results.  The more we study, the better we perform on exams.  The longer hours we spend in the hospital while in training produce greater experience.  When we operate more, we earn more RVU’s.  When we pick up more shifts, more money comes into the bank account.

We are hard-wired to believe that “hard work pays off!”  Unfortunately, this isn’t often the case in personal finance.

Reading the Wall Street Journal, P/E ratio determinations, and corporate annual returns will not necessarily produce a better investment result.

In fact, the more you learn about investing, the more you will realize that simpler investing normally wins.  There are a lot of reasons for this (lower fees, average returns, good diversification, etc), but one of the most important is that a simple portfolio will allow us to stay the course.

In fact, I’d argue that working harder when it comes to investing usually produces worse results.

Once we have a solid foundation in personal finance, the rest will follow suit.  You simply need to learn the 20% of personal finance that you need to know to get 80% of the results.  Then, you need to stick to the plan.

Eat Now or Starve

During earlier human times, one truth remained self-evident:  You should eat when you can, because you might now know when the next meal was going to come.  Human nature is hard-wired to consume now and to think later.

While this may have helped our ancestors survive before modern times, this behavior also leads to an immediate gratification consumerism culture that leads to really bad savings habits.

For Americans nearing retirement aged 60-69, the median 401K balance was a paltry $62,000.  That is simply insane.  For sure, part of this is due to the fact that pensions went away and we were left to save on our own. If we are being honest, though, a much larger part of this problem is that humans like immediate gratification and we are not natural savers.

You must know this.

If left to our own devices, you will spend what you make.  Once armed with this information, you can start to make your savings happen automatically so that you never see the money in your bank account.  This is a sure-fire way to get around our hard-wired tendancy to spend too much and to save too little.

Seeing Patterns

Dr. Bernstein alluded to this above.  Recognizing the “flash of yellow and black” may have saved us before, but patterns lead to trouble with investing.

Burton G. Malkiel, the author of the classic book A Random Walk Down Wall Street, provided a famous example of this in his coin flip experiment. He flipped a coin to produce a random 50/50 result with each flip, but charted it like a stock holding.  If it landed on heads, the stock went up. If it was tails, the stock went down.

After charting the results, he brought it to a professional technical analyst.  Upon reviewing the chart, the chartist said that they must go and purchase the stock. It was a sure-winner.  The analyst, who was paid to find winning stocks in charts saw a pattern that was produced by random chance.

When we see patterns in stock prices, we are playing a loser’s game.  We will naturally see patterns in the charts. It is what humans do. However, these patterns can lead to some of the biggest catastrophes.

“It’s 2008/2009 all over again!!”

Not so fast, my friend. Anyone who claims to be able to predict future markets is doomed to one of the worst financial mistakes an investor can make.  Namely, because our eyes are trained to see patterns, we will be tempted to buy high and sell low.  And there are very few things that will cost someone more dearly in the world of personal finance than making the “buy high, sell low” mistake.

Take Home

There are so many examples to prove Bernstein right about the psychology of investing being paramount to our success.  The other areas (the history, theory, and business of investing) matter, too.  Yet, none of them matter as much as the behavioral finance portion of investing.

So, take some time to learn about.

If you are looking for some books to get you started on this, I’d recommend the following three books for busy medical professionals:

  • How to Think About Money by Jonathan Clements.  This is the first book that I recommend to most people, partly because it is only ~150 pages.  It can be read very quickly, and it is a fantastic book. You can read my review here.
  • The Investor’s Manifesto by Bernstein.  This is the same author that was quoted at the beginning of this post and this is my favorite book by Bernstein.  It is longer than Clements, and focuses on much more than the behavioral finance aspect of investing.  However, it is a great book, and well worth the time spent reading it.
  • Thinking, Fast and Slow by Daniel Kahneman.  The author is a Nobel prize winner in behavioral economics.  This is a book for those of you who want to take a much deeper dive into the psychology of investing.  The first half of the book discusses human thinking in general before getting onto the various ways our minds fail and how that impacts our thinking.

Don’t defeat yourself. Learn how you think and then defeat the traps that you set for yourself.  Otherwise, you might find yourself failing because we are not hard-wired for financial success. We are hard-wired for something much less modern than the stock market.

What do you think about Bernstein’s quote?  Do you agree with him?  Is the psychology of investing the most important part aspect of investing?  Leave a comment below.


  1. Xrayvsn

    Behavioral finance is probably my favorite topic on finance.

    It is amazing how everyone thinks they are unique individuals but typically all follow the same stimulus response behavior that can be exploited/manipulated by those trained to spot these patterns.

    I fully agree that investing is one of the few areas where less research/evaluation is better. If you arm yourself with too much knowledge you begin to think you know better than the market and only a few people in history have been shown to consistently do that.

    • ThePhysicianPhilosopher

      Completely agree! Understanding behavioral finance solves most of the financial problems people face. People should ignore it at their own peril.

  2. Dr. McFrugal

    Definitely hit the nail on the head with this one. Behavioral finance is key. And it is much easier to be level headed and stay the course when you keep it simple and invest in total market index funds. You just know that the trajectory in the long term will always be up no matter what the market does in the short term.

    I have been investing / dabbling / speculating / gambling with single stocks for the past year using Robinhood just for fun to see how I do. Obviously, to me this is just play money and only 1-2% of my net worth. But man oh man, it is hard to keep up with everything and its hard to not stay the course. Sure, I made a few bucks on Beyond Meat after the IPO, but I had to watch it like a hawk and sell when I felt it was too overvalued. Definitely a game of speculation and NOT long term investing.

    Btw, I like how how in your article you have “Recognizing the ‘flash of yellow and black’…” and right beside that sentence to the right is a perfectly placed ad for your book, which happens to be in a yellow (or maybe it’s old gold) and black color scheme. Coincidence or excellent product placement? Either way, I think it’s genius!!!


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