Investing Truth No. 6: Fear and greed make investors do dumb things

By Mike Jones, posted March 21st, 2014

Most people think of investing as a personal activity that directly impacts their individual future.  However, most of what we are taught is really only applicable to investors en masse, i.e. the market-at-large, and over large periods of time.  Over the next several months I will share 10 points that I believe every investor should know prior to committing funds to any investment program.

Listen up! This month's investing truth is perhaps one of the most important for investors to understand. If you don't, you could end up making one mistake after another throughout your investing life, failing to experience the potential returns that the markets could have afforded you.

Studies show that the pain experienced with investment loss is approximately 2 1/2 times greater than the pleasure experienced from gain!*

Fear is an extremely powerful emotion--stronger even than joy--but it's not without purpose. Fear is one of our most primal, basic emotions, designed as a protective measure. The following is from Josh Kauffman's synopsis of John Medina's book Brain Rules:

Our brains are designed to protect us. 10,000+ years ago, threats were everywhere in our environment- enemy tribes, predators, dangerous animals, and hostile elements. In order to survive long enough to reproduce, our ancient ancestors had to live long enough to take advantage of available opportunities.

"So what?" you say, "We rarely face these sort of threats now days." Kauffman continues:

Our modern environment is very different than what our ancient ancestors experienced- opportunities are plentiful, and true life-threatening dangers are relatively scarce. The dynamic leads to what I call "caveman syndrome"- since we're trying to run modern software on ancient hardware, our prehistoric brains constantly magnify perceived threats and overlook opportunities. That's why humans often seem to do so many irrational and inefficient things.

So, fear, left untamed, will naturally entice us to magnify perceived threats to our investments as well as overlook possible opportunities.

You may not like to think about it, but a day will probably come when the bottom will seem to fall out of the markets. And no matter how bravely you may talk now, that moment is going to feel like the end of the world as you know it.

And when things feel that bad, all you want is for the pain to end.

So what will you do? Cash in? Sell all? Capitulate? Throw in the towel? Call it what you wish, odds are you will likely want to do whatever it takes to make the pain stop.

Ironically, when the pain of loss is at its most intense, the worst of the investment decline is often actually over, and this is precisely what makes such investing behavior so foolish. 

While investors may experience short term relief that "Mr. Market" is not hurting them anymore, long term remorse typically sets in once "cooler emotions"  prevail.

Wise investors understand their own human nature and begin the investing process with a discipline for both buying and selling. It is this predetermined discipline that can overcome the immediate power of fear in the moment of a perceived crisis.

The discipline of an investment management process (do you have one?), along with the support of an experienced investment manager (we can help you there too!), is a powerful antidote to the sudden onset of irrational fear. 

* Source: MebaneFaber.com

Mike Jones is Managing Director / Investing Group of Argent Advisors, Inc. Email him at mjones@argentadvisors.com. Write to him at 500 East Reynolds Drive, Ruston, LA 71270 or call him at (318) 251-5844. The opinions of any single advisor do not necessarily reflect the opinions of Argent Advisors, Inc.  No forecasts can be guaranteed.  Argent Advisors, Inc. does not offer tax, insurance or legal advice.  The information contained in this column should not be construed as a substitute for personalized investment, tax, insurance or legal advice.