Just stop it!
Advice on how to handle your worst fears
If you haven’t seen this show, it is definitely worth a 6 minute YouTube visit - Bob Newhart at his best, counseling someone on how to handle their worst fears.
One of the most important services we offer our clients is behavioral coaching. I say this because Investor behavior is greatly influenced by the extreme emotions of fear and greed which can drive the financial markets uncontrollably in either direction causing great damage in the process.
In stark contrast to this, most of us are quite comfortable walking into a store or shopping on-line to buy exactly what we want or need and are willing to pay a reasonable price for that purchase. We are either knowledgeable to begin with or have taken the proper time to research that purchase beforehand in terms of its quality and value. We would not typically volunteer to pay more for something than it is worth or to pay for something that we may not need, and we certainly wouldn’t feel frightened or run away when things are on sale and selling at a big discount.
Why is it then that the vast majority of people do exactly this when it comes to buying and selling things on the stock market? I believe that there are two main reasons for this; some people treat the financial markets simply as a game and allow greed to motivate their actions while others are more motivated by need and let fear get in the way of logic and common sense.
Logic and common sense would dictate that if you own a portfolio of boring, well-managed, brand-name companies that have been around for years continuing to grow their revenue and earnings and increasing their dividends in the process, there is a good chance that your portfolio will be worth more as time goes on. So what typically stands in the way of making this happen? Simply stated; bad investor behavior.
I read three newspapers every morning (National Post, Globe & Mail and Toronto Star) to get an interpretative insight to how our clients might react to the headline news on that given day.
I start with the front page section because it is usually the lead story that affects the mood of the reader for what follows in the business section. I have found that very seldom is the major story covered on all three newspapers ever reported the same way. The biggest differences are in the tone of the headline, the choice of words and the size of the font, all of which can have a huge impact on the reader.
It is surprising to learn how few business reporters have any formal education or training in accounting, economics or commerce. This doesn’t make them bad reporters necessarily but it does bring into question how the lack of any business experience might possibly skew their bias.
We are all human beings and are joined at the hip in terms of how we react to the two primeval gut drivers of fear & greed. The stock markets feed on both of these emotions which, during normal times, are kept in check by common sense. Every once in a while however, common sense is temporality abandoned and these two extreme emotions are left to slug it out on their own leading to all sorts of nasty things.
The catalyst that triggers all of this in the first place may change but the outcome is predictable. Common sense eventually returns and stock markets settle down and resume their more normal trajectory upward. More normal is simply a reflection of the inevitable growth in the underlying economy that is driven by the unrelenting change in demographics of a growing population and the insatiable desire to have more and do better.
We let the emotions of others or our own internal battle between fear and greed confuse us to the point that we sometimes follow the herd and lose sight of what we should be thinking or doing.
Just stop it!
Form a trusted relationship with a professional financial advisor who is both qualified and willing to counsel you on what to do in order to maintain your fiscal and mental health. After that, the next time you see a drop in the market, you will think of it as an opportunity and do the opposite of what you might have done before. You will become a contrarian and stand up to it. You will realize that it is normal. You will say to yourself that you have seen it before and it will probably happen again. It is human nature and you will get over it.
