Do you hate to admit that you are wrong? Do
you hang on to stock losers while muttering through clenched
teeth, "Don't worry, Dear. It will come back."
If so, as I said in my last article, you may be suffering
Get-evenitis is just one of a number of investor
diseases that have their basis in the King Kong syndrome.
This is the syndrome of selectively choosing data to support
your opinion. "Don't bother me with facts. I am the
mighty King Kong" is the mantra of those afflicted
with this malady.
This disease is not something new. For example,
Benjamin Franklin wrote, "So convenient a thing it
is to be a reasonable creature, since it enables one to
find or make a reason for everything one has a mind to do."
Or going back even further, in the Bible we read, "When
your herds and flocks grow large and your silver and gold
increase and all you have is multiplied, then your heart
will become proud ... and you may say to yourself, 'My power
and the strength of my hands have produced this wealth for
me.'" (Deuteronomy, 8:13-14, 17)
Even though the disease is not new, this recent
climate of stock market euphoria has led to a particularly
virulent strain. With this record bull market it is too
easy to attribute success to our own abilities and not to
How about the following remark as a King Kong
statement in the area of interest rates. In July 1993, Robert
Citron, the treasurer of Orange County, California, predicted
that interest rates would not rise. When asked how he knew
this, he replied, "I am one of the largest investors
in America. I know these things." Within a little over
a year it was public knowledge that Citron was deluding
himself. His prediction of how interest rates would move
was wrong, his error causing the Orange County Investment
Pool to lose $2 billion forcing the County into bankruptcy.
Even more, we often have the dangerous habit
of searching for evidence to support our beliefs rather
then openly considering information that might contradict
our opinions. According to B. Fishhoff in a 1982 collection
of papers called Judgment Under Uncertainty, we even 'misremember'
our own predictions in order give the appearance of having
made accurate forecasts.
Trading is another area where the King Kong
syndrome is very apparent. What is it about trading that
is so attractive? Here I do not mean individuals who make
all or part of their living by trading. Rather I mean trading
that is larger and more frequent than is justified by the
information available and the level of analysis. I call
this investor malady tradophilia, an irrational love of
When I think of this excessive trading I am
reminded of what Van Tharp refers to as the 'lotto bias.'
State run lotteries hit on a goldmine when they allowed
the participants to choose their own numbers rather than
be simply given a ticket. With this small change in the
way people can choose their tickets they now feel in control.
They can choose their own numbers and so have the illusion
of increasing their chances of winning. This illusion of
control, as it is referred to by the psychologists, leads
to overconfidence, even hubris, more signs of the King Kong
Am I being unfair on trading? Not according
to a study by Brad Barber and Terrance Odean of the University
of California at Davis in a paper published in the Journal
of Finance.) The authors examined the trading histories
of 60,000 households over a six-year period ending in January
1997. They found that after accounting for trading costs,
the households underperformed a general market-weighted
index by 1.1 percent annually.
There is more. The 20 percent of households
that traded most often had an outcome that was five times
worse than the general group. Their returns lagged the market
index by 5.5 percent annually. This figure increased to
10.3 percent annually when the analysis included the fact
that the high-turnover households tilted their portfolios
towards small stocks with high market risk. Barber and Odean
end their paper by saying, "Those who trade the most
are hurt the most."
It seems that the households, particularly
those with the highest turnovers, overestimated the value
of the information that they had. This is the same mistaken
belief that makes the choose-your-own number lotteries so
successful for those that run them.
We all have these investment diseases to varying
degrees and perhaps it is impossible to be completely free
of them. One of the best ways I know of strengthening our
immune systems so that the diseases are kept at a tolerable
level is to keep a stock book. Before you buy a stock in
a company write down some of its key features with particular
emphasis on those things that you consider most important
for your decision making process. It could be products and
competitors, it could be price and volume movements, or
it could be fundamental ratios. Or it could be that you
run through the analysis of Conscious
Investor. (Of course, I would hope that you would do
that anyway.) Whatever are the touchstones for your buying
and selling, take the time you need to implement them and
jot them down.
Peter Lynch was a great advocate of recording
his thoughts on different companies. When he was the manager
of the Fidelity Magellan Fund, Lynch kept a series of notebooks
in which he wrote down information on companies that he
analyzed or visited. He also required that his advisors
be able to make brief presentations on any companies that
they thought should be considered for the fund. Perhaps
you could try this with your spouse or a friend.
Whatever approach you take, my experience
is that like many diseases, the investor maladies described
above and the article Get-evenitis
and other investor maladies can exist on two levels.
Firstly, you can have acute attacks in which case your investment
life can come to a sudden and painful end. Secondly, they
can lie dangerously dormant for years. Then all of a sudden
one or more of them can flare up with unpleasant consequences.
Even if they don't flare up, they can exist at a nagging,
sub-clinical level causing your investing and trading to
be stressful and below par. But forewarned is forearmed.
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