Emotions Harm Investment Performance

Impatience is a time synchronization problem

Have you noticed that some people have a time frame that does not coincide with the world around them. Their time and the world’s time run at different rates. Impatience is hard on people, but hardest on the impatient one.

You cannot expect results from any decision sooner than the environment is prepared to deliver those results. Standing in the garden shouting at the corn, “GROW! GROW!” is moderately insane.

So is careless investment assessment

Portfolio management is not an hour to hour thing

Impatient people have no trouble with slot machines.  You put your money in, push the button and get a result. The stock market is not a slot machine. The wait between investing and getting a result is the problem. All sorts of spurious thoughts get in the way.

People make mistakes in portfolio management because they are impatient. Impatience, and its frequent counterpart boredom, are emotional and emotion is a difficult factor to build in to investing with predictable success. How does it show up?

People quit winners too soon.

“No one ever lost money by doubling their money.” While it sounds reasonable it is in fact, wrong. They may not lose in terms of counted dollars, but they lose if they include opportunity cost. If you bought Amazon in June 1997 at $1.47 and sold it in October at $3.90 you did better than double your money, but you made $2.43 and left $999 on the table.

People keep losers too long

“The market fluctuates; it will come back to what I paid for it.” That could well be true, but in the meantime you sold a winner to get some money to invest in some boredom reducing new adventure.

Thoughts on winners and losers

Canadian investment manager Ira Gluskin

“If you sell your winners when you have a small profit and keep your losers until you recover your money, you will eventually own every dog that hits the floor of the exchange.”

Renowned fund manager Peter Lynch,

“You won’t improve results by pulling out the flowers and watering the weeds.”

Be more thoughtful. You should sell any stock if you would not buy it at the current price. You should buy more if the price still looks good. “Hold” is a trap. Buy it or sell it.

 Over attention to detail.

Over attention to detail is time consuming and costly. Moving in and out of sectors or industries adds transaction and tax cost. Keep the purpose of the portfolio in mind and some of the details will disappear.

Don’t over-think your portfolio. The pie matters more than the slices.  Robin Powell

Don’t over-diversify. Holding too many securities creates trouble. Too much to look after. Charlie Munger has pointed out that no one ever got rich with their seventh best stock.

Misplaced values

Saving and investing is supposed to make your life easier not harder. Worry is an unsatisfactory byproduct of investing. We worry when the market is down. Oh no a mistake! We worry when the market is up. It will no doubt fall and probably soon. I must take action in either case.

I have noticed that most successful investment managers hold a great deal of cash compared to ones run by banks and the like. Why do you suppose that is? They are disciplined enough to recognize that not every day is a good day to buy. When days are not good to buy, they may be good days to sell. They thus tend to accumulate cash in a rising market and use it in a falling or fallen one.

My former neighbour, Lou Peters, summed it up best:

“Sell until you sleep.”

Cost Cutting

Some costs can be removed from your portfolio. Others seem to go away, but at the price of new ones appearing. Unmanaged emotions create new costs.

Defending emotional actions

Once we realize we are obsessive, compulsive, afraid, impatient and bored all at once, we can find a defense. Hire an advisor. Not one to manage your money necessarily, but one to look after details and manage you. Someone who can help you be planful.

All financial success comes from acting on a plan. A lot of financial failure comes from reacting to the market.
Nick Murray

It is very difficult to be truly objective with your own money and emotions. Seek help.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

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