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Do you have a money mind?

Photo of Todd Wenning

During this year’s Berkshire Hathaway annual meeting, Warren Buffett discussed the importance of his eventual successor as CEO having ‘a money mind’:

“People have to have a money mind. They can be very smart but make very unintelligent money decisions; their wiring works that way…

A money mind will know what needs to be done.”

Though I was in attendance, the importance of this commentary didn’t register right away. The more I thought about it, however, the more I realised it’s a great mental model for evaluating your financial skill set, as well as those of others such as fund managers and financial advisors.

We all know otherwise well-educated people who make dumb money decisions. That person might even be you from time to time, and I’m certainly in that camp.

Indeed, in a moment I’ll share why even financially-savvy people may not always be in the right ‘money mind’ state.

Putting your mind under the microscope

So, what is a money mind and why should it matter to you?

A money mind should:

1. Understand opportunity costs

Put simply, opportunity costs measure the gains you’ve forgone to make another choice.

Let’s say you choose to attend one university over another. Since you can’t attend both simultaneously, your opportunity cost is what you would have benefited by attending the other school.

As investors, we face opportunity cost decisions all the time, whether we recognize them or not. Cash or shares? Bonds or property? Company XYZ or the FTSE 100?

A money mind will acknowledge his or her objectives and time horizon, and balance those with current market opportunities.

For an investor with a 30-year time horizon, for example, the potential opportunity cost of holding cash is rather high when considering that the stock market’s returns over rolling 30-year periods have been consistently positive.

2. Have high emotional intelligence

Warren Buffett also famously quipped that:

“Success in investing doesn’t correlate with I.Q… Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”

There are four critical aspects of emotional intelligence, according to Travis Bradberry and Jean Graves in their book Emotional Intelligence 2.0.

These four aspects are: Self-awareness, self-management, social awareness, and relationship management.

As investors of our money or someone else’s capital, we must be able to recognize our biases (self-awareness), be able to act at times against those biases (self-management), understand the emotions of other investors (social awareness), and balance our emotional state with theirs (relationship management).

These requirements are a tall order, especially when we’re facing outside stressors in our personal lives.

A few years ago, for instance, my wife and I bought a car immediately after moving to a new city and buying a new house – both major life events. By the time we walked into the car dealership, I had decision fatigue and didn’t spend enough time preparing for the purchase the way I normally would have. I ended up overpaying.

An ideal money mind would have Spock-like reason and be immune to outside stressors, though this is more science fiction than reality.

Instead, seeking a state of controlled emotion seems the best strategy for most. A money mind will more frequently strike the right balance.

3. Be able to think and act long-term

Rarely will you find a capital allocator or company executive who admits to being short-term focused, but the numbers tell a different story. Capital allocators such as fund managers frequently feel the pressure of monthly, quarterly, or yearly results. Portfolio turnover is much higher than it otherwise might be.

For an investor to truly think and act long-term, they must have the personal capacity, the right clients, and the right investment vehicle to do so.

If you manage money for someone demanding quarterly performance, for instance, you will have a hard time executing a long-term objective. This could be a reason why Buffett operates a corporation with steady insurance float to invest, rather than managing an open-ended mutual fund.

We individual investors have a tremendous advantage in our ability to be patient, since we have no outside capital ready to flee following a year of market underperformance. Sadly, few investors fully capitalize on this valuable advantage.

Money minds will seek out environments that will enable them to execute their objectives.

4. Judge investments on value and not on price

One of the bigger mistakes that investors make is buying things that look cheap based on price alone, without consideration to quality.

It’s an issue we often face as consumers. Let’s say you need a new coffee maker. Prices might range from £10 to £200 for a top-of-the-line brewer. The ‘cheap’ shopper will simply grab the one with the lowest price but runs the risk of coming back to buy another when it breaks due to poor assembly. The ‘value’ shopper, on the other hand, will find the highest quality coffee maker for what she needs at the best possible price.

At this year’s Berkshire meeting, both Buffett and his business partner Charlie Munger discussed how important the purchase of the See’s Candy confectionery chain was to their development as investors. Leading up to that investment, Buffett in particular was more attracted to so-called deep value shares. But he came to understand the attractiveness of buying a quality franchise at a good price and holding it patiently.

A money mind will recognize the folly of being penny-wise and pound foolish.

5. Be insatiably curious and contemplative

When I interview company executives, my last question is typically a request for book recommendations. More times than not, the manager will look at me like I have two heads.

“A book recommendation?” they’ll reply. This isn’t the response I want to hear.

While most analysts ask about quarterly trends or expected capital expenditures for the year, I’m more interested in finding out if the executive is a learner and thinker. Some CEOs and CFOs have told me they don’t have time to read, which could be a sign they can’t manage priorities or don’t consider reading a priority. Neither is a positive sign.

Every so often, an executive will light up upon my request and talk about a book they read on history, business, or science. This is more like it. Money minds will be fascinated by new ideas and figuring out ways to glean lessons applicable to their operations.

Bottom line

In a previous post, I suggested that assuming a normal distribution of capital allocation skill among company leaders, perhaps 3-5% can be considered exceptional. A true money mind is rare and isn’t always consistently so over time.

Nevertheless, whether we aim to wisely allocate our own capital or someone else’s, possessing a money mind is a goal worth pursuing.

What other money management skills might you add to my list above? Let us know in the comments below!

Todd Wenning, CFA is an equity analyst based in the United States. Opinions shared here are his own and not those of his employer. A full disclaimer can be found here. For compliance purposes, Todd cannot reply to comments below, though he welcomes any correspondence sent by email. You can read Todd’s expanding collection of dividend articles here on Monevator or check out his book, Keeping Your Dividend Edge.

{ 11 comments… add one }
  • 1 Dartmouth July 27, 2017, 10:40 am

    Over time it may be interesting to see how today’s teenagers and undergrads adjust to the demands of financial decision making. Raised in a culture of instant gratification via smartphones and the internet, patience is going to be in short supply.

  • 2 The Investor July 27, 2017, 11:24 am

    @Dartmouth — The evidence I’ve seen so far suggests they are much more cautious about money. I also think that growing up with over 10 years of low interest rates and with literally daily stories about financial hardship and often crisis are going to be more influential in the long-term compared to smart phones. (Young people have always been distracted! 😉 )

    In addition, in the UK the shift to growing up with tens of thousands of pounds of debt hanging around your neck and — in the South East at least — little realistic prospect of buying any sort of vaguely spacious property for you or any family, under your own steam, are going to be big mind changers, too.

  • 3 hosimpson July 27, 2017, 12:58 pm

    6. Having made a mistake, recognise it as such and take a (timely) corrective action.

  • 4 Mrs. Adventure Rich July 27, 2017, 1:05 pm

    I really like this outline of a “money mind”. It is amazing how, regardless of our knowledge of finances and money, our emotions can take over to sway our decisions and lead us to very un-money minded decisions.

  • 5 Dartmouth July 27, 2017, 4:08 pm

    @The Investor Oh dear, that sounds pretty grim all around.

  • 6 YamiKuriboh July 27, 2017, 5:02 pm

    Regarding CESs and reading recommendations, I would have hoped these busy executives at least had the time to have read their own annual report and maybe recommend you do also!

  • 7 FI Warrior July 28, 2017, 9:28 am

    I think curiosity is an incredibly under-rated factor. When a student, I asked my Phd supervisor what the most important characteristic was that he looked for in selecting us and it was curiosity; it enables you to always raise your game, even if already doing Ok.

    I have an acquaintance for example who is an MBA yet is relatively unsuccessful in his business and surprisingly naive in investing or money matters generally. I put this down to his strict adherence to the prevailing dogma (neoliberal economics that was eventually unequivocably proven a failure by the GFC) taught at the time he did the qualification.

    This narrow focus prevents him seeing other/possibly better options, because he misses the point, which is that things will always change in life, therefore it’s the principle that is of ultimate importance, not the particular method, in achieving any given aim.

  • 8 Grand85 July 29, 2017, 10:24 am

    Thumbs up for this piece – food for thought! Will definitely share.

  • 9 Anon July 30, 2017, 1:52 pm

    A very nice list. I’m with hosimpson’s comment that a missing element seems to be something about learning from your own mistakes. Maybe the “and contemplative” in 5 is supposed to cover that, but then the text there seems to be more about learning from other people.

    I find myself pondering on the “nurture vs. nature” aspects… I was recently discussing with a relative the problem of another relative who seems to have some sort of “anti-money mind”. Money passes through their fingers like water and they just make one bad decision after another. Their sibling has to live in a one-bed flat as a defence against them turning up and staying indefinitely. Despite that, they’re one of the most kind and generous people you’re ever likely to meet. Apparently similar characters have been a recurring feature of the family’s history, which makes us wonder if there’s a genetic element, maybe a survival trait from ancient hunter-gatherer societies where food sharing is a universal pattern (and to the overall benefit of the group). Your “money mind” list, on the other hand, seems like it might also be quite a good checklist for being a successful farmer… but agriculture has only been around for ten thousand years (c.f a couple of million years of hunter-gatherer subsistence) so maybe being money minded is so hard/rare because it’s so at odds with what’s been successful for most of our evolutionary history.

  • 10 JasonR August 7, 2017, 7:04 pm

    I’m learning to appreciate Ravensburger board games (or similar resource management type games like 7 Wonders) for practicing the skills of assessing opportunity cost, evaluating risk/reward, compound growth, etc. that are essential to successful investing.

  • 11 The Investor August 7, 2017, 8:36 pm

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