Emotions Kill Formulas
Poor advice and erratic, emotional behavior result in stock market and investment losses, regardless of how good your advice was. Poor advice can come from friends, brokers or advisory services who just happen to get it wrong. Obviously, it is impossible to detect just how poor the advice is until it is too late, and guarding against it is virtually impossible—unless it is disregarded altogether.
Emotionalism is another matter. Carefully controlled classroom experiments in speculative behavior have shown that, even when relieved of paying commissions on numerous transactions and of the emotional involvement of handling real money, people tend to chalk up heavier losses than gains very much as they do in actual investing. Furthermore, the lack of correlation between speculative success and intelligence or professional investment experience, suggests that some set of as-yet-unknown emotional factor is at work.
Donald I. Rogers, Business and Financial editor of the New York Herald Tribune, quoted an unnamed broker to the effect that many investors lose money intentionally (on an unconscious level) in order to assuage deep feelings of guilt. Whether this is so, the fact is that few investors are really successful in the market. They tend to buy a stock on the crest of its rise, hold it while it goes down, and sell in disgust either before it recovers or when it rises barely enough to produce a slim profit.
There is no reliable method of finding out how successful individual investors are today. But if the Wendt study of investor experience in the thirties is any indication, we may assume that many of them have little reason to be satisfied with their results.
For those investors whose results are somewhat less than brilliant, formulas can supply an” answer, and probably can be said to “work,” by any reasonable standard. They most certainly help to protect the investor against the dangers of emotionalism, and offer a guide to action that can protect him from acting under the perhaps unwise impulse of the moment. Furthermore, they do not freeze him in an inflexible vise that prevents him from exercising his own judgment or irritates him through lack of action, but they do supply a measure of self-discipline. And if the formula is adhered to with some degree of tenacity, the investor’s results should be improved to a great extent.
While it is probably an exaggeration to assert that “any plan is better than no plan,” even a mediocre plan may produce better results than those attained by the average hit-or-miss investor, alternately subject to panic, agonies of indecision, impulsive action on ill-advised tips and a hundred other damaging influences.
The essential element for success in the use of a formula is consistent and unwavering application of its rules of operation. Once an investor selects a plan, he can expect satisfactory results only if he sticks reasonably close to it, no matter how bleak the short-term outlook may be. As will be seen, the route to an impressive record of profitable performance is littered with brief periods of relatively unfavorable action. But the simplicity of formulas, and their clear-cut indications for action, make them much more practical even under such adverse circumstances than most other investment techniques.
In short, formulas will not endow the investor with brains if he doesn’t already have them, but they do reduce the quantity of brains necessary to come out of the market with a profit. And remember to remain cool-headed at all times, as emotions will at the very least cloud one’s judgment.
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