The other day, I met with Victor Mireles, from Mireles Creative, and he introduced me a new word, something that defines what I am trying to achieve both for myself and my clients; I just didn’t know there was a word to describe it: sophrosyne. Interestingly enough I met before with her “evil twin”: hubris.

First of all, both words are Greek in origin and completely opposite to each other, and at the time were widely used to explain certain behaviors both from people and gods. According to Wikipedia, Hubris is often used in English to indicate an excess of pride, even arrogance and it often results in fatal retribution. For the ancient Greeks, hubris was their greatest sin not only because of the excessive pride, but also because of the “outrageous treatment” from those to committed it towards others.

Hubris and investing are very closely related. Time after time we’ve seen that some of the most brilliant minds are those that are often related with the biggest losses and frauds. Take, for example, Sir Issac Newton. The developer of some of the most relevant theories in humanity -even today, more than 280 years after his death; because of his developments, scientists can accurately calculate the trajectory of a moving object and the effects of gravity over it, they can also calculate the effects on a vehicle crashing with another one, saving innumerable lives through the development of more efficient vehicle designs. Sir Newton lost an important portion of his fortune in the “South Sea Bubble”, when he invested in stocks of a company that was referenced as one that “could never fail”. It is said that Mr. Newton mentioned regarding his losses: “I can calculate the motions of the heavenly bodies, but not the madness of people”, which tells us again about the unpredictability and randomness of the markets.

NEW YORK - JANUARY 14:  Accused financier Bern...
Madoff’s Investors were probably misguided by hubris. Image by Getty Images via Daylife

Today, some of the most brilliant minds in our era were defrauded by Bernard Madoff: Jeffrey Katzenberg, the CEO of DreamWorks Animation (he produced movies like Shrek and Madagascar), Steven Spielberg (creator of movies like E.T., Schindler’s List, Jaws, and many more) , Sen. Frank Lautenberg of New Jersey, Nobel Prize Winner Ellie Weisel’s charitable organization,  among much others including various prominent charitable organizations lost unspecified amounts (some people say the fraud counted for possibly $55 billion dollars) because of their “investments” with Madoff.

What does this tell us? In my opinion, the success of these people in their endeavors, leaded to excess of pride on themselves -first part of the definition of hubris- about finding the “secret” way to achieve high returns regardless of market conditions. Because of their success -they possibly thought-  they were able to find a hidden jewel that would generate them returns not available to people with less success or money than them. What happened? The second part of the definition: fatal retribution. They lost everything -some even their lives- of what they invested with Madoff.

But, Madoff’s investors aren’t the only ones that have had an excess of hubris, in my opinion, everyone who believes that  possesses superior means to “outperform” the market or to “time it” properly shows an excess of confidence (that includes hedge fund managers, the majority of mutual funds, and most financial advisors); individual investors are often carried by the marketing hype or the excess of trust they deposit in their brokers, ignoring that most times they are only looking for their own benefit (as I discussed in THIS article).

That leads us to prudence and sophrosyne. Prudence originally was referred as the hability to judge between vicious and virtuos actions, and was perceived as a presessor of wisdom; sophrosyne, on the other hand, means moral sanity and self control guided by true self-knowledge. The complete opposite of hubris. A person that has achieved sophrosyne understands her capabilities and limits, just like an investor that realizes that she can’t predict consistently and predictably which way stocks/bonds/funds are going to move so she could outperform the market; and instead accepts market rates of return (i.e. through an structured portfolio of index funds) as the best way to eliminate anxiety about her investments. She also would look for guidance to eliminate emotions in their investment process and to help her design, implement and stick to a life-long financial plan. She would also eliminate all sources of gambling and speculation in her portfolios, because that only leads to stress (and thus, reduces moral sanity and self control) and would also understand what are the risks in her investments to eliminate surprises both when the markets are going up as well as when they are going down (as they often do).

Obviously, these concepts  (sophrosyne and hubris) aren’t limited to investing. They are ways of life. The first usually leads to a life full (or almost full) of enjoyment and true realization of whatever God (or whoever you believe in) has given you; while the later leads to stress, anxiety, and sometimes even death. Most of the times it is a matter of choice. What do you prefer? Moral sanity and self control? Or overconfidence, and greed?

If you would like to find sophrosyne in your investments, or just have a question or comment, you may contact me through this FORM.

Special thanks to Mr. Mireles for introducing me to “sophrosyne”.

This article reflects the views and opinions of Miguel Gomez.

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