Limping with the bulls: A psychologist tests the market
Things are quiet this morning and my heart is beating at its usual steady rate. The adrenaline that was coursing through my body yesterday at this time has subsided with the frenzy of trying to sell some shares of a hot stock that has been climbing steadily from a recent low.
This is something new for me though I’ve been dabbling for the past several years at the encouragement of one Mr. Buylow Sellhigh who enjoys this sort of thing and is quite good at it. I am not a serious investor, but I am curious and, under the sway of Mr. Sellhigh, I may even have a touch of FOMO, fear of missing out on the excitement and wealth that playing the market can provide.
The excitement came yesterday when a stock that we bought last week near the “ground floor”(See, I already know some of the market terminology) skyrocketed a day later, offering a perfect opportunity, if not to “make a killing,” at least to inflict some serious harm in the market. Perhaps I should have unloaded some of our shares then, but I’ve been told that I did not because greed held me back with its seductive promise of even greater rewards in the future.
As a psychologist, I am well positioned to understand this dynamic though my training has also taught me the value of delayed gratification. Of course, I would prefer to think of myself as someone who has mastered his impulses rather than someone who is just plain greedy, but perhaps this is just another example of Shakespeare’s “rose by any other name.”
The cold hard fact is that I didn’t sell, not on that first bullish day nor on the next one when the price continued to rise until something happened. What happened was the release of the company’s quarterly report showing that it had missed its earnings target by a few pennies. A few pennies, no big deal, right? Not according to Wall Street, and so my stock began its descent.
The next day, I felt like I was standing in front of an elevator looking up at the lighted numerals counting down the floors until it came to a stop just above the one where I got on.
Behavioral psychologists and professional investors tell us that this was a test of my ability to control my fear—fear of losing, if not everything, then at least enough of my real and potential earnings to make me sell prematurely. This time I passed the test, and the following day, yesterday, I watched the elevator resume its climb.
I was watching from the library where I was dividing my time between reading up on the psychology of investing, checking the price of my new stock, searching for a column idea and consulting by phone with my wife, my chief advisor in all things, including the market.
We watched as the price rose to a point where we had decided to sell some of it, then fell a few pennies, then rose again, bouncing up and down within a small range of acceptable sales prices. And then we made our move. We did well, making a small profit and reducing our risk, while leaving enough on the table to benefit from the stock’s projected long term success.
I even wound up with a column idea, which I am writing now, while only occasionally glancing at the state of our portfolio. Wordsworth said that poetry is intense emotion recollected in tranquility, and while this is not poetry, I am certainly feeling tranquil compared to my intense emotional state of the last few days.
My research into the psychology of investing opened my eyes to the wide expanse and interplay of factors involved in determining the state of the market, the price of individual stocks and the behavior of investors. Much of what I learned comes from an article on the psychology of investing by Jim Osman writing in Forbes magazine online (https://www.forbes.com/sites/jimosman/2023/04/30/the-psychology-of-investing-how-to-avoid-losing/?sh=31069605300e).
I learned that it takes a cool, analytical mind to win in the market, and even then, victory isn’t guaranteed. Still, the advantage goes to a well-developed prefrontal cortex that can keep the emotional amygdala in check when fear, greed, FOMO, vanity, and pride all try to set the course.
One source reported a higher success rate for investors with a Myers-Briggs INTJ personality type, reflective people who tend to see the connections between the many variables involved in any problem and then proceed quickly to a well-reasoned decision. Okay, they’re not cognitive abilities, only preferences, and I’ve got two of them, so I might still make a go of this game.
Once we have our emotions under control, the experts remind us, we still need to attend to our cognitive biases that can lead to faulty appraisals of a company’s earning potential. The anchoring trap can lead us to jump on a stock for an irrelevant reason while confirmation bias can keep us there with a steady stream of selective information that supports our initial foolish decision.
There are a lot more of these mental traps that I will not bother listing here. We just need to clear away the noise of unruly emotions and faulty reasoning, the experts tell us, to see investment opportunities in companies with steady profits, positive cash flow, and little debt.
Really? How hard can that be? Well, there are a few things I did not mention, like understanding how other investors’ emotional reactions, cognitive biases, and willful manipulation of stock prices affect the market.
It all adds up to a time-consuming venture that can invade your dreams and color your perception of everyday routines. When I woke up this morning, our outdoor thermometer read 57 degrees and my first thought was that I’d sell when it hits 60. Even so, with luck and a little help from Buylow, I may be able to manage my new stock to earn enough to reduce my losses from earlier investments, but first I have a few non-starters to unload. How about a ski lodge in the Brazilian rainforest? Anyone interested?