Wednesday, March 31, 2010

MarketPsych Presents: Market Beer Goggles, Part I

College, 1992: A Flashback

It happened late at night. It always happens late at night. The keg was kicked and the host was reduced to breaking out a bottle of Peach Schnapps that had been in the back of the liquor cabinet since the Nixon Administration. What. A. Party. You danced a little. Drank a lot. And you spent the last hour on the couch canoodling with this really hot girl (or guy as the case may be). You asked your model-esque romantic interest if he/she wanted to find some place a little more private...
Yep. It was a pretty cool night. That was until you got the party photos back. Looking at them now, you see that something is strangely, terribly amiss.
"That's definitely me on the couch", you think, "I have the matching Guinness stain on my Polo shirt to prove it. But who in the name of Extreme Makeovers is that decidely un-hot person sitting next to me?!" And, follow up question, "What did I do? (gulp) Please tell me it's not what I think it is!"
Beer Goggles: noun, A metaphorical set of "eye-glasses" worn after excessive alcohol consumption that makes otherwise unattractive individuals extremely desirable.
Back in college, it was known as Beer Goggling. And for most of us college is where it stayed. We all get older, and generally that means wiser. We learn to make better choices, to channel our impulses. As we mature our lifestyles change, we settle down. But while we don't break out "The Goggles" at parties anymore, we sometimes break them out in "The Market".
How does it happen? What is this intoxicating mixture that distorts our judgment, lowers our standards, and causes us to hook up a dreadful, "oh-my-gosh-I-did-what" stock. It's a pretty simple recipe:
Market Love Potion #9
2 Parts Media Hype
2 Parts Greed
2 Parts Impulse Control
1 Part Peer Pressure
Shake well. Serve over crushed ice. Garnish with lemon peel.
Welcome to MarketPsych's new semi-regular feature, Beer Goggle Stocks! Where we use hindsight, and the harsh, wince-inducing light of day to illuminate those times we became intoxicated by a stock or sector and made a regrettable choice that could have been avoided if only we were thinking clearly.
We will highlight a number of these investments. Analysis will include a "before" and "after" picture, a break down of the emotional/cognitive/social factors that led to misjudgment and an outline for how to avoid such mistakes in the future.
Like the old T-shirt, "Friends Don't Let Friends Beer Goggle".
And at MarketPsych we like to think of ourself as your investing friend. The responsible one who takes your car keys, orders you a cup of black coffee and walks you around the block when you're not thinking straight. So if you've ever hooked up with a hot stock only to later to see it was a dog... stayed tuned for part II.
Coming Soon: Market Beer Goggle Part II - Ethanol, I Promise I'll Love You in the Morning.
In the meantime, happy investing.
-Dr. Frank Murtha
MarketPsych is the premier Investing Psychology Consulting Firm. We have been doing talks, keynotes, workshops, training, coaching, consulting in Investing Psychology since 2002. Our clients include individuals and institutions in all areas of the financial community. Contact us at [email protected] for more information on how we can help you.

Thursday, March 25, 2010

Do You Like Scary Movies?

You're watching a movie - a thriller actually. You just don't think of it that way.

You laugh at the happy parts. Lose interest a bit during the slow parts. And occasionally, when there's a plot twist... it scares the living hell out of you. The funny thing is you actually know how it's going to turn out in the end. But that doesn't stop you from "getting into" it.

The movie is, "The Market" and it show times are M-F, 9:30 AM through 4 PM (EST).

Okay. It's not technically a movie. Nobody's selling $8 popcorn and it doesn't have Ben Affleck in it or anything (thank God), but a movie is a good way to think about your investments from a psychological perspective.

Take James Bond movies, for example. When we watch a Bond flick, we know what we're getting into. He's going to use some cool gadgets, drink a martini, save the world, "get the girl", etc.

But at certain times during the film, there are moments in which 007 is in mortal peril (inordinately involving buzz saws, lasers, and exotic predatory animals). If we've been following along, if we're "into it", we experience an unavoidable emotional reaction - anxiety, or as the movie business euphemistically dubs it, "suspense".

We can't help it. We experience this supense because we follow the story not just with our eyes, but with out brains, and that means we follow it on an intellectual and an emotional level.

In fact, it's almost as if our emotional brain and our intellectual brain watch the movie on a couch together and during the suspenseful parts, wrestle for control of our head.
Sometimes the conversation looks like this. (Watch the following classic clip from Goldfinger to really provide the context.)


(Note: The Emotional Brain not only speaks in exclamations, it uses all "caps".)

Intellectual Brain (IB): I say, get a grip, lad! It's a half an hour into a 3 hour movie. He'll be fine. Stiff upper lip and all that.

(Note: The Intellectual Brain is not only the voice of reason, it has a 19th century British accent.)


IB: Yes, yes. Dire straits, indeed. But we know full well that Daniel Craig signed a 3 movie deal. Can't just dispatch him in the first one, now can we? Wouldn't be cricket!


IB: - All right, all right, lad! I suppose a bifurcated John Thomas is more than you can bear. No talking you out of it, this time. I'm going to send a neuro signal to the hands to cover your eyes... now. And hand me those pretzels, old boy. You're getting crumbs all over the floor and I just had it cleaned yesterday, don't you know.


Now, it should be said, we have enough data on James Bond and on the major market indexes to know what happens in the long run. But when we're watching the movie, we're not in the long run. We get drawn into the emotions of the moment and we struggle, sometimes in vain, to restore a big picture perspective.

The above conversation is essentially what our psychological defense mechanisms look like when we watch a movie or when we watch The Market. The tactics are certainly the same. Get us out of the "moment" (short term) and refocus on the big picture (long term). Supplant emotion with reason, fear with facts.

And sometimes when we can't reframe from a short-term to a long-term perspective, we simply cover our eyes (i.e., stop watching). It's an excellent last resort tactic that is underutilized.

So enjoy your thrillers, if that's your thing. And enjoy your Market watching. But remember what it is your watching, and retain that ability to pull yourself up out of that short-term emotional tailspin. Because you will get draw in and it will happen without your awareness (just like in a movie).

And if you insist on watching scarey movies, in the name of Freddy Krueger... do NOT watch them alone.

Happy investing.

-Dr. Frank

MarketPsych is the premier Investing Psychology Consulting firm. We do talks, keynotes, workshops, training, coaching, consulting with out clients. They are consistently rated as highly educational, professionally valuable, and fun.