Defending Against the HypeDecember 21, 2009 Posted by: Joe Morgan, CFA
At night, when all the world's asleep
The questions run so deep
For such a simple man
Managing one's psychological state is critical for the successful investor.
This includes everything from finding balance between quantitative and qualitative inputs to ensuring you are mentally sharp when critical decisions must be made. The same, I guess, could be said for almost any endeavor.
Focusing too much or too little on any single input can lead to serious pitfalls when it comes to placing your money on the line. The biggest mistake I see in this regard results from the so-called "24/7 news cycle" that dominates investing and politics. (Remember how awful the Dubai World announcement earlier this week was supposed to be? That fizzled out in less than 24 hours.)
When barraged from sunup to sundown and beyond with inconsequential information or extreme over-analysis of inconsequential data, the human brain begins to perceive things that don't exist. Daily price movements, in particular, increase in seeming importance, though their true value may have changed little. Add to this the efforts of a profit-oriented media whose charge is to gain viewers, and a dangerous cadre begins to work against the successful investor.
As an example, let's look at daily movements in the Dow Jones Industrial Index. In 1997, the Dow averaged 7,443 with a daily average price movement of 64. There were 52 days of 100-point movements with 27 up-moves and 25 down.
Thus far in 2009, the Dow has averaged 8,800 with a daily average price movement of nearly 96 points. There have been 90 days of 100-point movements with 48 up-moves and 42 down. A 100-point move is now only 1.1 percent of the average value during the year, and given it is an "average" daily move, it clearly shouldn't be considered "news." But take a look at the news coverage and, in particular, the tone of daily commentators as they describe what is really a typical day, and you might think it much more important. A quick listen to any market recap on the news and you will be barraged with how much the market moved that day, even on...Read More