If you were offered tens of thousands of dollars for being patient, bored or nerdy, would you take it? It turns out the financial markets will pay you handsomely for certain rather unspectacular behaviors. But you’ll be charged significant penalties for other behaviors and attitudes, such as FOMO (Fear of Missing Out). It’s up to you – pay or penalty. Which will it be?
If you read about investor behavior you will find a wealth of academic research about mental biases, funny tricks in the brain that lead you down the wrong path. Some that you may recognize are “Regret Aversion” or “Illusion of Control”. You can see more here. Not all investor behaviors have to be complex bias frameworks. Here are some simple behaviors that you can follow. Where do you stand on the behaviors below?
The market PAYS you for:
- Patience: Don’t act for the sake of scratching that urge to act. Know when less is more.
- Boredom: The market is fun-agnostic. It doesn’t care if you’re enjoying the daily process. Dull can be a good thing.
- Worry: If you can handle some discomfort in choppy markets — and not act on it — you’re ahead of the game.
- Courage: Are you brave enough to adhere to your original investment philosophy? Stick with it and recognize that on certain days you are not going to feel 100%.
- Pain: Down 20%? You’re toiling away at work but still losing wealth. Like it or not, it’s just part of the process. Endure the short term pain for the possibility of long-term gain.
- Loneliness: Did your friends all panic? You may be the only one left who didn’t sell. That’s generally a good sign of a market turnaround coming soon.
- Being a nerd: Investing is a contact sport. Instead of helmets and pads, you need excel sheets, research, models, statistics, etc. Don’t go in unprotected.
The market CHARGES you for:
- Action: Transaction costs, bid/ask spreads, market timing. Action costs money in the markets. Approach with care.
- Excitement: Twitter IPO. Get it while it’s hot! Feel the rush! Casinos want you to have this feeling. So do options trading desks.
- Comfort: Ignoring, putting off, pushing it down the list of priorities. Sound familiar?
- Emotion: Feeling aggressive, under pressure, beat down? Take your time or pay the price.
- Being part of the crowd: CNBC, WSJ, Barrons, Yahoo Finance, etc. The pundits are begging you to follow them. Be aware, but don’t buy or sell on the media chatter or headlines du jour.
- Instinct: Your gut is telling you what to do. But what does your gut really know? Take your time and think it through.
Think slow. Your initial reaction may end up being the best decision, but only after you’ve completely thought through it.
This article was inspired by the famous Fidelity stock picker Joel Tillinghast. I had the opportunity to hear him speak at the HBS investing conference this past weekend.
From Joel: “I believe the market pays investors for patience; for boredom, worry, courage, pain and loneliness; for being a nerd. Conversely, it charges for action, excitement, comfort, emotion and for being part of the crowd.”
Max Osbon – mosbon@osboncapital.com
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