Friday, June 7, 1996
The Unemotional Investor
by MF DowMan

Oh no! Quick! Sell everything! No ... wait ... buy more! Now!!!! No ... wait ... buy half and sell half? What do I DO???????

Sound familiar? It should. Whenever a stock drops quickly, that creature inside us called self-doubt grabs us by the throats and starts choking us. If you think Greg Norman choked in the final round of this year's Masters, just wait until you see one of your stocks drop 40% in a week, or worse, in a day! Your collar suddenly feels three sizes smaller, even if it's unbuttoned.

And the worst thing is, we've ALL been there. By definition, humans are emotional, and self-doubt and fear, especially when it comes to one's money, are two of the most powerful emotions you'll ever feel. Excepting the most egotistical boors you've ever met, we've all second-guessed ourselves when an investment didn't go the way we hoped. Is it just part of the investment game, an affliction that must be endured in order to invest in stocks? Perhaps, but I think there's a way we can avoid much of the anguish at least, and probably help our returns at the same time, if by nothing else than the fact that it keeps us from making panic decisions, which are never well-reasoned.

The answer is something Jim O'Shaughnessy, a Greenwich, Connecticut money manager and investment writer, calls "strategic indexing." Almost everyone knows what indices are: the Dow Jones Industrial Average, the S&P 500, the Nasdaq Composite, and many others. Strategic indexing is simply O'Shaughnessy's term for what we call in the Fool "mechanical" investment approaches, such as Beating the Dow and Investing For Growth.

The approaches have several strengths, especially if you discover, like I have, that self-doubt and fear can be paralyzing emotions. The first is that the approaches take the decisions out of your hands. The models are completely unambiguous. If you're investing on June 7, here are the stocks you buy. Bam ... you're done. After a certain time period, you wake up, check the new list, call your broker. Bam ... you're done again.

The fact that these approaches have long-term proven records of beating the market allows you to ignore the short-term fluctuations. When a stock, or several stocks, or even your entire portfolio lags for a while, you can hold firm to the discipline because you know that in the long run you're investing Foolishly and your approach is sound.

I'm not suggesting that a mechanical approach, strategic indexing, is the only way to do well. The Fools have proven that a more hands-on approach can produce remarkable results. But if you want to turn yourself from an emotional, undisciplined investor into an unemotional, disciplined, cold-hearted market killer, give these approaches a look. You may find that life's a little easier and sweeter. There's much to be said for simplicity, Fool!

Transmitted: 6/7/96