Investor Psychology

by David Forrest ([email protected])

Tempe, AZ (Oct. 16, 1998) -- Is there room in the Unemotional Investing Motel for a column on psychology? I've been thinking a lot about how investors react to different periods of market volatility. I was speaking with a reporter from Dow Jones last week, and we were talking about how individuals in our forum have been reacting to the market's decline.

This was on the day when the Nasdaq was down 77 points at 3:00 p.m. before rallying back. I told her that people in the forum had been acknowledging that there's a possibility of us being in a bear market. I also noted that people have been talking about selling short and looking for ways to make money when the market goes down. She and I thus concluded that we must be near a bottom when so many people who were incredibly bullish at 9200 are just now thinking about making money on the short side.

I'm sure of one thing. When people who normally consider themselves long-term investors start changing their approach because of market volatility, they get killed. It's the folks who don't panic or start questioning their assumptions who do really well. And, while I can think of a number of reasons not to blindly follow stock screens like Keystone, the one thing I love about not investing emotionally is that you stand by your assumptions about long-term investing. You don't freak out and start questioning whether you're doing the right thing.

Losing money is lousy. Almost as bad is seeing a big gain turn into a small one. When this happens, we naturally start thinking, "Darn, how could I have avoided this??? Maybe if I timed the market, or listened to the gooroos who told us to sell, this wouldn't have happened." We're always looking for ways, in hindsight, to figure out what we should have done. Don't do it.

I'm not saying that we shouldn't learn from past successes and mistakes, but I am saying that trying to second-guess your portfolio because the market takes a beating for a while is a very costly thing to do. Things have a way of taking care of themselves, and sticking with your thought-out plan is most often the best thing to do. Using the recent bumpiness as an example, you'd never have known that Greenspan would come in and cut rates twice in a month. We also don't know how these cuts will affect the market in the next year or so, but I am absolutely certain that stocks, over time, outperform most every other asset class.

All of this is to say that one of the reasons I'm drawn to things like the Keystone screen is that it consists of huge companies with solid businesses and because it allows me to sleep at night, even in the rough times. Don't second-guess yourself. Your portfolio value will yo-yo from time to time. Accept that, and sleep well.

Best,
Bogey

Check out the latest file updates for the Workshop:
New Rankings | 1998 Returns | New Database