Jim Lorenzen, CFP®, AIF®
“If you think investing is fun, you’re doing something wrong.” – Warren Buffett
I’ll never forget visiting with a nice couple who was seeking advice on planning and investing. All of a sudden one of them piped-up and said, “I really like trading; it’s fun, and I’ve been pretty good at it.”
When I asked how they did during the market meltdown, I was told they broke even. I guess they were like everyone you know who just returned from Las Vegas.
I guess there must be a lot of people who do, considering all the active trading commercials you see on television, despite all the educational resources available that debunk it’s effectiveness on a consistent basis. If Warren Buffett won’t do it, why should I?
One colleague tells his clients that pain in a strong indicator of good investing. In other words, if a potential buy feels right, it’s probably best to hold off.
Studies seem to prove reveal that the human mind is often disconnected from reality. If their feelings toward an activity are positive, they are naturally moved to judging the risk as low. This explains why so many tend to buy when the market’s good and sell when it goes down. Not surprisingly, a whole new field of behavioral finance has emerged that explains how we can think we’re being logical even as we do illogical things:
Data mining: We tend to look for patterns that validate our beliefs.
Recency bias: If stocks fall, we expect it will continue. When they go up, we think that will continue, as well. The most recent events are more important than an event that happened three months – or years – ago.
Confirmation bias: When stocks go down, our belief is confirmed that stocks are high risk and low reward – which is why so many move to cash until the market comes back (buying high).
Herd effect: While many investors believe they’re contrarians, research shows the human animal is more likely to follow the herd. – because we believe the herd is led by experts.
The fact is there are many other risks out there, often ignored by those trying to build their retirement asset base. I even recorded a webinar about why many retirement plans are doomed to failure. The important note is sometimes lost: Those who begin early – and do it right – virtually always outperform those who do it wrong until they’re 65 and worried.
When it comes to trading, maybe Warren Buffett just might know something our nice couple didn’t.