Testing your emotions

It is a well-known fact that 80% of professional money managers underperform their relevant index. Even worse, a large percentage of investors lose money even when investing in mutual funds that outperform their relevant index.

Between the years 1980 and 1992 the most successful fund in the United States compounded annually at more than 25%, yet most investors lost money. How is this possible? The average investor held the fund for seven months.

Being raised in Manitoba, a prairie province, I know that you cannot plant seeds in August and expect a wonderful crop in September. It takes patience and time. Yet with so much instant information available to us every day, we evaluate our returns on a daily and weekly basis.

Can you imagine if you did this with your home? Imagine coming home from a hard day’s work and turning on the TV or computer and evaluating the price of our home. Sounds crazy, doesn’t it? Yet so many investors do this on a daily basis. I am amazed at how many investors know the stock price on Nortel every day, when five years ago, most Canadians thought Nortel made phone booths. One should think that access to more information should make you a better investor right?

What the successful investors will agree is that these erratic emotions and actions by investors are rooted in the psychological forces that seem to underlie most of the poor results. Warren Buffet, known as one of the worlds greatest investors once said To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insight, or inside information. What is needed is a sound intellectual framework for decisions and the ability to keep emotions from corroding that framework.

Mr. Buffet is absolutely right. The fact is we all want instant gratification, and investing is no different. We want returns without risk or time. We don’t want volatility, yet we want consistency. We don’t want to do exactly the wrong thing at exactly the right time. So the next time you read your statement or watch the financial news, ask yourself what am I really trying to accomplish here. What is my expected return annually averaged over a five-year period, not annually, or worse weekly and daily? Have faith in businesses, not the stock market. Have promise in management, not stock prices. Have trust in people, not in numbers. Have hope in recognizing and understanding your emotions and be patient when others are not.

If anything looks back in history and you will see that patience in a time like this has always been rewarded.

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