06 Nov Behind The Buy/Sell Urge
“Salt, Sugar, Fat,” a book by journalist Michael Moss gained attention on its recent release with the revelation food companies purposely engineer their products to make them irresistible.
You won’t be shocked to learn the basis for irresistibility was refining the right amounts of salt, sugar or fat.
Even if your favourite yoghurt went ‘low-fat’ to allay your health concerns, the fat was inevitably replaced with more sugar to keep you hooked.
As long as we have cravings, urges and senses to be excited, someone will be looking to exploit them.
It’s no different when investing.
The part of our brain that we struggle to control – the amygdala or ‘lizard brain’ – dictates how we’ll react in market downturns or when we’re presented with ‘investment opportunities’.
Like quick gratification from salty, sugary or fatty food, this part of our brain seeks the short-term gratification of buying and selling investments to satisfy urges of fear and greed.
It’s why we’re peppered with ever-present ‘buy’ and ‘sell’ recommendations from brokers and fund managers – they benefit from our urge to buy and sell.
And despite the overwhelming evidence that forecasts and recommendations are bad for the investing public, the “what will happen next” theme remains the thrust of media focus.
Take early March 2009, the point of final market capitulation, as untold numbers of investors spooked by predictions of further financial woe, embraced the safety of cash.
Here are the implications for a long term investor changing strategy at that time.
$100,000 in a balanced portfolio on 1 March 2003 would have grown to $195,956 by the end of February 2013, even with a market meltdown it still outperformed cash, which finished at $168,174.
Dumping your balanced portfolio strategy for ‘safety’ in March 2009 would have left you with only $160,693.
The best way to stop greed and fear dictating investment returns is to have a clear investment strategy and focus on the long term.
Unfortunately, on the salt, sugar and fat, I’m as vulnerable as anyone!