Why we're bad at investing part 8: We compare ourselves to others

One factor driving risk taking, high portfolio turnover, and investment restlessness is the fact that we are constantly comparing ourselves to others.

Studies show that most people would prefer to earn $80k while their neighbors earn $60k, rather than earn $100k when their neighbor earns $120k. This has a couple of insidious effects.

First of all, it’s not healthy. Because no matter how much wealth you have, there will always be someone with more. Knowing that you have “enough” will allow you to live with peace that a rich person always pursuing “more” will never know.

Second, it’s a large contributor driving bull markets and asset bubbles. As a stock market advance matures, you inevitably hear more stories about people you know getting rich. Often these people getting rich are absolute morons. And so you think, “if they can do it, it must be easy,” and you open a brokerage account and start trading volatile and risky stuff just to try to catch up.

As Charles Kindleburger wrote in Manias, Panics and Crashes: A History of Financial Crises, “there is nothing so disturbing to one’s well-being and judgment as to see a friend get rich.” It’s a quote that cuts to the bone, only because it is so true.

Comparing ourselves to others is a flaw that encourages risk taking at the wrong times. Because when everyone is making easy money and the market is ignoring risk, you need to be leaning in the other direction. As Buffett famously said, “be fearful when others are greedy, and greedy when others are fearful.”

What I’m asking you to do goes against human nature.

It requires self-awareness and self-control.

It’s really difficult.

And that’s why it works.