Finding Your Inner Investor (2)

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We return to Justin Mamis' book, The Nature of Risk, Stock Market Survival and the Meaning of Life.  We ended the last post wondering what is it about risk that could be used to help the individual investor improve his or her return in the stock market.  Let's pick up where we left off with Mr. Mamis:

Let's examine one daily life situation - crossing the street - to see what the risks are:  When risk is examined in terms of the moment-to-moment decisions - stepping off the curb being an assumption of risk with all the dictionary negatives of hazard, peril, exposure to danger, but also with a positive: to get successfully to the other side - risk is at its core making a decision.  It is a form of binary Yes/No, for Maybe merely postpones choice.  Crossing the street involves an absolute danger: a car coming can hit you and knock you down, injuring or killing you.  Therefore, we have learned certain safety rules:  Cross at the intersection, with the light in your favor, and not in the middle of the street.  So we are taught to look both ways before crossing.  But then, getting a little bolder, we come to believe that if we follow the second rule - looking both ways - we can safely cross in the middle of the block.  And suppose we are in a hurry.  Can we simply rush across - looking as we leap?

Clearly, then, we can either take what we know about proceeding safely and turn it into an assumable "safe" risk, or, in a moment of thoughtlessness, actually take an unnecessary risk.  Although infinitely more complex, the stock market is more like crossing the street.  The stock market is as moment-to-moment within a long-term trend as life is.  People think:  I'm buying this house to live in while the babies grow up and go off to college; I'm marrying this person "till death do us part" - long term investments but moment-to-moment decisions.  We get caught up in emotions, and believe our feelings represent our judgment about the long-term values.  Thus there is a distinction between the religion of long-term beliefs, hopes and expectations, and the secular short-term practice of our moment-to-moment behavior.  Although we might be convinced that the decisions we make have that long-term basis, they stem from the moment.  Life's decisions have an auction fever:  you're buying as an investment, but standing up in the audience waving your hand for attention, desperate, at that moment, to buy at an even higher price.

Similarly, so-called long-term investors make buy or sell decisions for moment-to-moment reasons.  A portfolio manager may contemplate buying a stock  but has decided to wait until he or she gathers more information; along comes a short-term rise sparked by news - the Fed cuts the discount rate, for example - and the money manager can't stand being patient any longer, bangs on the phone to get the trader's attention, and buys right then and there into the excitement, up 2 points.  On the sell side, stocks get tossed out emotionally - even though they were originally bought to be held for a "three year time horizon" - just because the market looked awful this morning while it was selling off.  The portfolio manager can't endure seeing - literally seeing at that moment - the money disappear.  Watching the market every moment can turn any long term investor into a hypochondriac.

Americans are often described as basically optimistic, when in reality it is that they are perpetually hopeful.  The market seems to represent hope itself.  And yet, among professionals, even those who function on the stock exchange floor, a frequently heard stock market expression is, "No one ever said it was going to be easy."   It never can be easy because the rule of the market is that you have to act before you know enough.  Because it is a process there is no one moment or single point, at which one can make an obvious "sure" decision.

Mr. Mamis seems to describe how some people make an investment decision in a paraphrase of the old shooting lesson, "Almost ready, try to aim, fire anyway."  We will return to him once more in the next post and see what else he has to share with us.

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Excerpts form The Nature of Risk, Stock Market Survival and the Meaning of Life by Justin Mamis, copyright 1991, are used with permission of Mr. Mamis and Fraser Publishing Company.