In a 2008 on-line Yahoo Finance article entitled, “Can’t Save, Blame Your Brain,” Jason Zweig takes a look at the very real battle that goes on in people’s brains when faced with instant gratification versus riches down the road later. We’ve all heard the adage, “Hold out and wait for something better,” and we all know we need to save, but it turns out that the average holding period for a stock, among individual and professional investors alike, is a mere 11 months! So much for long-term planning!

Zweig explains that recent tests in neuroscience labs tracking peoples’ choices and their brain activity, confirm that the average person has a hard time resisting, for example, $20 immediately versus $20.25 six hours later to $110 six months later. In test after test, whether it was Amazon gift certificates, fruit juice sips or money, people bailed out on the wait and went for the gold NOW. Turns out only when the payout is a big one (lotto anyone?) are people willing to delay gratification.

“Cocktail Party Chatter & Speculate Now, Pay Later

You’re at a cocktail party. Someone is bragging about all their fabulous investments, never mentioning their losses. They get you so wound up that you want to know exactly what they have, so you can go out and buy it too!
Take it from me; this kind of thinking and behavior only leads to inappropriate, and even irrational, decisions regarding your portfolio. Certainly not to the kind of long-term savings you’d probably realistically like to see. Investors who give into instant gratification end up chasing performance. Inevitably performance eludes them, they chase even harder and eventually they wind up in a tail-chasing circle – chasing performance.
This is why CAIM’s first two essential principles are; Focus on the long-term and stick with your investments AND Adjust your portfolio based on your own changing investment goals, NOT market changes or ‘hot’ stocks.

When you handle your investments with the long-term in mind, resist those innate ‘brain’ urges to jump on the hot gold stock you’ve just heard about, you reap the very real rewards of successful, professional investing.

Today’s Case Study

Jason Zweig’s article reminds me of an eye-opening experience I had when managing a very conservative equity income fund at Morgan Stanley. It was 1999, right at the height of the dotcom era and money was pouring out of my fund in droves as clients rushed to jump on the latest ‘hot’ dotcom stock! I was shocked! I got on the phone and called the financial advisors who had the most money in my fund. I gave them my lecture of how overvalued the technology companies were, and how these conservative clients needed to stick with my fund for the dividend and the potential turnaround to come.

It all fell on deaf ears. I was told instead; “My clients feel left out because they are not up 50% this year,” or “I’ll lose the account if I don’t do something."

The next thing you know, Morgan Stanley announces they are opening up a technology mutual fund in January of 2000. Luckily I could track all the redemptions in my fund. By January of 2000, the
size of my fund was cut in half because of all the money going into the tech fund!
Well, we all know what happened by March of that same year. The tech bubble finally burst. These poor (conservative) shareholders who were appeased by their financial advisors lost a ton of money. You could almost understand the angst that was going on inside the heads of these clients…”Everyone else is making money but me!” However, a true investment professional will spend the time with their clients to ensure that they are making the right decisions for their future.