Hope Is Not A Plan

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As we have seen from past blogs, a certain percentage of market action and many stock purchases are based on psychological, not financial, factors.  Professor Malkiel captured the essence of this in his book, A Random Walk Down Wall Street, when he pointed out, "Stocks are bought on expectations -- not on facts."*

In his book, When To Sell - Inside Strategies for Stock-Market Profits, Justin Mamis discussed expectations as follows:

Stocks are bought not in fear but in hope.  No matter what the stock did in the past, it assumes a new life once a purchaser owns it, and he looks forward to a rosy future -- after all, that's why he singled it out in the first place.  But these simple expectations become complicated by what actually happens.  The stock acquires a new past, beginning from the moment of purchase, and with that past come doubts, new concerns, new conflicts.  The purchaser's stock portfolio quickly becomes a portfolio of psychic dilemmas, with ego, id, superego, and reality in a state of constant battle...especially since, in the stock market, one is never quite sure what the reality is.**

He went on to advise his readers to consider carefully the reasons for their stock purchases:
 
Let's be straightforward about it: the widespread and deep-rooted neuroses that affect virtually all decisions in the stock market are the subject for a different kind of analysis.  Stock-market analysis is the task of separating real possibilities from mere hopes.  And the path to doing this successfully is by concentrating on what you do know because it is actually happening -- current prices, volume, statistics, etc. -- rather than on what might happen or should happen.**

(Author's emphasis in bold)

Adam Smith in The Money Game quoted from Gerald Loeb's book, The Battle for Investment Survival, concerning hope and other factors which impact stock prices:

Market values are fixed only in part by balance sheets and income statements; much more by the hopes and fears of humanity; by greed, ambition, acts of God, invention, financial stress and strain, weather, discovery, fashion and numberless other causes impossible to be listed without omission.***

Every individual, whether investing for the long term or speculating for a quick profit, must learn to recognize the emotional forces which prey upon him or her and curb them to the extent possible.  Since we are human, we can never fully succeed in this task, but that does not mean we shouldn't make the effort.  One of the best ways to reduce the emotional aspects of stock purchases and ownership is to remember Adam Smith's advice:  "The stock does not know you own it."

*  Excerpt from A Random Walk Down Wall Street by Burton G. Malkiel, copyright 2012, 2011, 2007, 2003, 1999, 1996, 1990, 1985, 1981, 1975, 1973 by W.W. Norton & Company, Inc is used with permission of W.W. Norton & Company, Inc.

**  Excerpts from When To Sell - Inside Strategies for Stock-Market Profits, Justin Mamis, copyright ©1994, published by Fraser Publishing Company, are used by permission of the publisher and Mr. Mamis.

***  Excerpt from The Money Game by Adam Smith, copyright © 1967, 1968 by Adam Smith published by Random House, Inc., page  22.

Comments are always welcome.