Saving money is a natural starting point for many people who have become interested in investing. Your amount of savings grows from saved money and paid interest. The buying power of those funds is also preserved as long as paid interest equals or surpasses current inflation.
However, it is beneficial to learn how to switch your mindset from being a saver to being an owner. Being an owner also means being able to take care of your investments by making independent judgements and decisions about assets. Owner takes responsibility of the investments by being informed about the status of the assets and actively assessing what needs to be done to take good care of them.
Mindset of a saver is poorly suited for investing
If the investor considers his/her investments only as potentially more profitable form of savings, investors mind is fixed on preserving the value of those investments. Investor is likely to fall victim to many psychological fallacies, which might greatly affect investor’s ability to make good investing decisions.
Psychology affecting investors is studied by Behavioral Finance. One of the fallacies is called anchoring, meaning investors anchor the value of their investments to some historical value, and compare that value to a current value when making investment decisions.
By anchoring the value of an asset to some high value, any future value that is below that anchored value is considered to be a bargain, or “in the loss”. Investor might buy an asset thinking the value will eventually “correct” to the anchored value. Or the investor might quickly sell holdings of that asset and try to stop the losses.
Anchoring is more beneficial concept when thinking about money in savings account, because the saver is and should be concerned about preserving the buying power of that money.
One similar concept associated with saver’s mindset is the tendency to avoid losses at all costs. Savers fears the thought of having the value of their assets drop even temporarily and try to prevent significant drawdowns by quickly selling their holdings at the slightest drop of value.
Both of these concepts are harmful to investors and their ability to make good investment decisions.
Being an owner means taking responsibility
By switching their mindset to that of an owner, investor’s goals also change. Now, instead of trying to preserve their investment value, they instead focus on making sure their investments are being taken care of properly. This is where the value creation happens: Markets put a higher price on assets that are in good shape.
Being an owner of property/land/company
Thinking as an owner is more natural when we’re dealing with concrete stuff like property or land. Also it’s natural to think like an owner when you have money invested in a company where you are in a leading position and able to influence the company direction in day-to-day matters.
Being an owner in a publicly listed company
Being an owner in a publicly listed company is of course a bit different than being an owner in a private company. If you have only a small stake, the best you can do is keep yourself informed of the company business, attend shareholder meetings and of course, buy and sell stakes freely at market. However, thinking like an owner has clear benefits even for a small investor.
What you can do, is evaluate the actions of the current leadership. That’s what the board, which represents the majority ownership, should be doing. Is the leadership communicating their vision and goals clearly? Does their vision align with what you think the business should focus on? Is the leadership measuring and presenting success on achieving their goals?
Obviously, if the answer to these questions is no, then it’s only prudent to do what a small owner can do: Sell their holdings. Being an owner also means, that you plan and act according to a plan spanning years or decades. Give the leadership some time to show their quality, and act accordingly.
Owner’s mindset can be trained
If you think you don’t yet have the vision to judge individual company leadership, it’s fortunately easy enough to practice it by following the company news. What do you think about news and press releases about the company? Is the company on right track?
If yes, then follow along and see what happens to the stock price. The market is very effective in judging the company and it’s leadership: Right decisions eventually lift the stock price.
If the stock price lags, then something is wrong. The judgement of the markets does not view the current leadership favorably, and the company is possibly on the wrong track. What was the reason you thought otherwise? Did you buy in the hype? Was there more fundamental forces at play that the company leadership failed to address?
Burden of ownership
The reason why thinking like an owner might not feel natural, is that you are required to make constant judgements with what little information you can get. It’s a demanding exercise with unclear chance of success. And sometimes even if you are right, the unthinkable happens and company goes down anyway.
There are options for those investors, who for some reason do not like to make this effort. By putting your money in a mutual fund, you pay the fund manager to make these judgements for you. Investing, like many other pursuits in life, should be rewarding and fun, and not something that makes you stressed and unhappy.
Investors do theirselves a favor by making the exercise of seeing if owner’s mindset is something they can acquire, or do they prefer to pay for someone else for that. Even then, you need to have the mental clarity to recognize that this is not something you want to do and need to seek help with it.
Consider though, that even if you invest in something like passive index funds or ETFs, you’re making an owners decision about how to allocate your money. Being an owner is something most of us have to practice anyway, as we acquire stuff like cars, houses or land.