Originally published January 21, 2008.
Investors have a bad habit of treating the stock market like a Monopoly® game. These same investors then forget that they are playing with real money instead of play money until it’s too late. You’ll do yourself, and your investments, a favor if you go to the movies instead.
When you try to make investing entertaining, you start making decisions that aren’t based on what’s best for the long term but rather on what perks up your day. And because you’re human, it’s easy to get caught up in the roller coaster of emotions. First, there’s the rush of making the deal, followed by the edge of your seat anticipation, waiting to see what happens. You’ve only got two options: 1) the excitement of winning or 2) the depression of losing.
What’s next? Starting the cycle all over again with only one difference: it’s harder to duplicate the same excitement, so you push harder, making the risk of losses greater every time you go around the board. Again, we aren’t dealing with play money. This is the real thing, and you’ve worked too long and too hard to throw it away. Trust me. Go to the movies.
For more information about how this behavior, and other’s like it, affect your investor return, check out the Behavior Gap Snapshot.
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I believe that this problem has its roots in the idea that stock returns come from a giant Random Number Generator in the Sky. If stock returns are unpredictable, as we are so often told (the claim that timing doesn't work suggests this, does it not?) then isn't stock investing really just gambling? Aren't we all just putting our money down in the hope that a good number happens to pop up? If that is the attitude with which we begin, how can we fail to come to see investing as an entertainment (one that often shifts from comedy to tragedy)?
I reject the Passive model, which is what gets us thinking this way. My starting premise is that of course returns are largely predictable at least in the long run, that of course long-term timing always works even if short-term timing never does. When you start with this idea rather than the Passive idea, some amazing things happen to your attitude to investing over time.
For investors with this attitude, it's not an entertainment anymore. Rational Investors are not surprised by the price changes we see. We ignore the short-term changes because we know on a deep level that they are inconsequential. And we anticipate the long-term changes years in advance (because they have played out the same way over and over again since the market first opened and always must continue to do so if the market is to continue to function). We are not surprised by the stock market's tricks. So they don't make us laugh or cry. For us, it's not entertainment anymore.
The key to getting over the idea that investing is entertainment is seeing the reality that is the cause of stock returns. It is the productivity of the U.S. economy that determines long-term stock returns. All that you need to know to avoid thinking of investing as entertainment is that U.S. productivity has been sufficient to finance a 6.5 percent real return for many, many years and any return higher than that is cotton-candy nothingness that is being borrowed from your future returns. Stop taking the nominal returns reported in the newspapers as serious numbers (always adjust for valuations) and the game aspect of investing goes “Poof!”
Rob
Hi, the link to Behavior Gap Snapshot is 404ed.
Thanks, Amit. I've fixed the link, but you can also find the Snapshot here.
That's why my Roth and 401(K) are in index funds, but I have a sharebuilder account. Every so often, I buy a stock or two. 2 share of MSFT, 1 share of EBAY, I put $100 in BAC when it was so low this spring.
It can be entertaining, if you've got the right perspective.
A share of MSFT is better than going to a bad movie, at least.
Yeah, definitely better than a bad movie!
That's why my Roth and 401(K) are in index funds, but I have a sharebuilder account. Every so often, I buy a stock or two. 2 share of MSFT, 1 share of EBAY, I put $100 in BAC when it was so low this spring.
It can be entertaining, if you've got the right perspective.
A share of MSFT is better than going to a bad movie, at least.
Yeah, definitely better than a bad movie!
Channels like CNBC try to make investing ionto a game , and bring a casino atmosphere to the stock market. However investing money is serous business and can be very rewarding financially
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