psychology

You Are Somebody, Not Everybody

© Can Stock Photo / Bialasiewicz

Our pursuit of effective strategies for successful investing covers a wide range of disciplines. Economics and mathematics are obviously needed, but history and psychology play surprisingly large roles.

As contrarian investors, avoiding stampedes is a fundamental principle for us. We often find ourselves going against the crowd. It turns out that there is a lot of conventional wisdom with which we disagree.

The world is complex; humans use shortcuts all the time to keep things simple enough to handle. The problem arises when characteristics of a group are ascribed to each individual within the group, as a shortcut way of dealing with people.

For example, Americans on average are sedentary and overweight. But if you watch who enters the door of the YMCA at 6 A.M., you know that the group characteristics do not apply to every individual. We use this same principle to find clients who will not sell out at low points or fall for the latest overpriced fad.

Behavioral economics indicates that humans tend to behave in counterproductive ways when it comes to investing. But just as the “Y” does not treat each member as if they were overweight and sedentary, we know that counterproductive behavior is optional at the individual level. We choose to try to avoid it.

We were reminded of this recently in reviewing some studies about happiness. The studies show that people quickly take new things for granted, homes and cars for example, so the initial happiness soon wears off. But in our experience, this is a matter of choice.

When in Louisville, I live in the humblest quarters ever since I graduated from college. I am grateful to have an abode that meets my modest needs. In Florida, my days are spent in a nice home that is wonderfully suited to our family. My gratitude and appreciation and happiness about that never flags. This just puts me right in the middle of the pack of the greatest clients in the world. (Our opinion.)

When we read studies about behavior, we will always remember that you are somebody, not everybody. Economists and psychologists can prove all they want about human tendencies, but we will not accept their findings as your fate or ours.

Clients, if you would like to talk about this or anything else, please email us or call.

A Tale of Two Theories

© Can Stock Photo Inc. / ambro

Psychologists have a strategy to help cope with anxiety called the “dual model strategy.” It works like this:

You have a concern about some imminent disaster, which you believe is the source of many troubles for you. This is “Theory A.”

The alternative is that your concerns may actually be unfounded, but your fears themselves are creating your troubles instead. This is “Theory B.”

When it comes to investing, Theory A probably sounds like this: “The problem is that the economy will crash and I will lose money.” Theory B would then read: “The problem is that I worry that the economy will crash.”

If Theory A is correct, the proper plan is to pull your investments out of the market and put your money someplace safe. But there are two problems. First, we’ll never know if Theory A is correct until it is too late. Second, the economy and the markets have eventually recovered from every previous downturn. If you act on Theory A, there’s a good chance you may end up hurting yourself by acting at the wrong time. But Theory B—the idea that your worries are the real problem—is something that we can always work on.

The question is, how do you cope with your anxieties about the market? Perspective is important. Most of us are in this for the long haul, and are counting on our investment basket to provide for us for years and decades to come. Watching the market slide may be nerve wracking—but if you look back over the years, the speed bumps are barely noticeable.

Even so, it is easier to say “stick with the long term plan” than it is to live through short term bumps. There are some practical steps you can take to help cope with your market anxieties, too. Make sure you keep a cash reserve for emergencies: your investment portfolio is not a replacement for money in the bank. Also, as you reach the point in your life when you start to rely on investment income, it’s important to understand where your income is coming from. Even if you fear a downturn in the markets, it may not necessarily affect the ability of your income investments to generate cashflow for you to live on.

The key in all of this is to come up with an investment strategy that you’re comfortable with. If you continually change tactics every time you get nervous you may hurt yourself financially. If you need help coming to terms with your investment worries, please call or email us to talk them out.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss.