The Emotional Share Market

Yesterday, John Kay, the author of the Truth about Markets (which I highly recommend to everyone – one of the better books I have read for a long time) wrote a short piece on the Financial Times, on the current share market correction and its… erm, psychological effect on normal investors. Very fun and insightful. Go and read it.

Watching Share Market will Not Make you Happy

By John Kay

…(B)ut the paradox is that if you do not have complete control over your emotions, you can have too much information for your own good. Many investors have just spent a nervous weekend. But someone who fell asleep over Christmas lunch and woke for St Patrick’s Day would be entirely relaxed: his portfolio would have barely changed in value.

Nassim Nicholas Taleb, the trader and author, illustrates the curse of knowledge with the example of the investor – call him Warren Buffett – who substantially outperforms the market over the long term. If Warren looks at his portfolio only every five years, the results will almost always be encouraging. If he reviews his investments annually, he will have observed more good years than bad ones. But even a successful investor who looks at his portfolio every day can easily become depressed. Fifty one per cent good days and 49 per cent bad days will produce a good result, just as someone whose coin tosses work out 51 per cent of the time will become extremely rich. But it may not feel like that.

For those who follow events too closely, the pain of regret can far outweigh the joys of success. Life, and markets, contain so many missed opportunities…

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Accept that most market movements are statistical noise that convey no information about the past and provide no guidance about the future…

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Monitoring your portfolio every day will impose a high emotional cost for negligible financial benefit… (M)any investors will have concluded that the current turmoil makes it vital to be close to the market. The opposite conclusion is true.

Teehee

On the same topic, this is by Henry Blodget from Slate.com, in his latest piece on his Bad Advice series, aptly titled “The Market's Crashing! What Should You Do Now? Um, nothing”. Hehe. Go read it too.

It started with:

Last week's mini-plunge produced the expected blizzard of stories on the theme: "The Market's Crashing! What Should You Do Now???" The implication, of course, is that smart investors should pay close attention to what the market is doing and adjust their strategies accordingly. Nothing could be further from the truth.

And went on to give four cliché, but useful to remember advices:

• No one but Nostradamus knows what the market is going to do. Last week's sell-off does not make it any more or less likely that the market is going to go up or down this week (or, for that matter, this year).

• No one but Nostradamus can time the market consistently. If you knew the market was going to crash, the answer to "What should you do now?" would be obvious: Short the world. Alas, numerous academic studies have shown that successful market-timers are, at best, an extremely rare breed.

• If it really matters to you what the market does in the next several months or years, you shouldn't own stocks. Sorry to alarm you, but stocks are a very risky investment over periods of less than five to 10 years, no matter what the market is doing. If you need your money before then, you shouldn't have it in stocks.

• The last thing you should base your investment strategy on is what the market has done. One of the most common and most devastating mistakes investors make is "driving with the rearview mirror," as Warren Buffett puts it. Specifically, they buy investments that have done well and sell those that have done badly. Although this strategy feels comfortable, it is idiotic.

Dum dee dum,

Elanor

(emphases and underlines all by me)