I spent last weekend surrounded by the happy chaos of a family reunion. Thirty-four of us hung out together for two and a half days, and 20 people (ages 1 – 80) spent two nights at our house spread out in sleeping bags, beds and couches. We ate too much, played uber-competitive cornhole, and stayed up late talking.
One of my cousins is a radiologist, so he inevitably gets asked questions about changes in health care or a medical issue someone’s having. Another cousin, who graduated with her PhD when she was about 22 years old, works for the Pentagon in areas we aren’t allowed to know about. She’s always asked for insights into geo-political conflicts. Me? I get the investment questions. And the questions I get prove my family struggles with the same issues that trip up other investors.
After discussion about the recent SEC vote on money market funds, the Inevitable Question (‘So, I know you don’t believe anyone can consistently predict where the market will move next, but what do you think it will do?’) and my son sharing a cartoon jab at the hedge fund industry (Caution: mild profanity) one family member pulled me aside to complain about his stock broker.
“So my investment guy helps me buy stocks, but then he never calls me to say it’s time to sell them. I think we should sell out of them when they start to go down, before they drop farther, and then buy back into them when it looks like they’re doing better.” This sounds perfectly logical. Who wants to lose more money? Get out before you lose more, and then get back in when things look better. “I can’t get my wife to agree with me.” That’s because she realizes that market timing can disguise itself as ‘perfectly logical.’ Get out when a stock drops (Lock in loss; check!) and then get back in when it looks like they’re doing better (Translation: Usually after the stock has gone back up above where you sold it, because that’s when you’re finally convinced the company is doing better.)
Another relative has their money invested with TAAG, but has kept a much smaller account as a ‘play’ account we monitor and report on for them as well. This situation has provided enough material for me to write an entire book on behavioral investing, but three important lessons I’ve learned from this arrangement were reinforced for me over the weekend:
When people manage their own money, they will focus on their winners (and tell their golfing buddies and brother-in-law all about them) and ignore their losers. The losers are explained away by market factors and other things beyond their control, but the winners are due to their hard work and insight. “I made 37% on Facebook this year!” (And he lost 39% on Twitter and 11% on Yahoo, but these we shall not discuss.)
For some people, trading stocks is like gambling. The thrill of a win provides such a rush they can’t give it up, even in the face of clear evidence they are losing money. This, of course, is why Vegas has so many big, beautiful gambling casinos. Our human ability to deny facts or reconstruct the past is amazing sometimes. But computers track long-term returns without the benefit of our selective memory, so we know the ‘play’ account has a return of 3% per year since it was opened. The TAAG managed account has a return of 7%. The lower performing account is higher risk than the TAAG account, because it holds 99% in stocks, while the TAAG account holds only 60% in stocks. For higher risk, they should receive higher returns over a long-term period of time (17 years.)
His original investment in the ‘play’ account would have earned over $500,000 more if it had been in the TAAG account – a gain larger than his original deposit. But he wants to continue managing the account because it’s fun. Which brings me to my next lesson.
For many, investing is about entertainment, not money. I understand some people enjoy reading about companies, preparing spreadsheets, analyzing financial statements and selecting stocks to buy. Others decide to buy shares in a company after they use a product or service, enjoy the experience and want to be a part of it. But investing for fun and entertainment can be a very expensive hobby if you play with more than you can afford to lose.
I tell potential clients (and relatives) that TAAG isn’t for everyone, because some people find our methods boring. It may not be as fun to go to a golf outing or family reunion when you don’t have stocks to (selectively) brag about. But I would prefer to have a higher net worth and financial security than bragging rights on Facebook.