Sunday, January 23, 2011

CHOICE - The Advisors Perspective

As a child my familys menu consisted of two choices: take it or leave it. - Buddy Hackett

In an article, The Tyranny of Choice, in the December 16th edition of The Economist magazine, the authors cite a number of interesting statistics, including the following:
  • The average American supermarket now carries 48,750 items, more than five times the number in 1975, according to the Food Marketing Institute.
  • Even the professions experienced enhancements. Take medicine for example. America in 2008 alone saw 2.5m Botox injections, 355,671 breast implants, 341,144 liposuction treatments, 195,104 eyelid lifts and 147,392 stomach tucks, according to the American Society for Aesthetic Plastic Surgery.

The investment industry is not immune from this phenomenon. Consider that (according to the ICI Factbook), there were 7,691 mutual funds in the US, an 18 fold increase from the 426 available in 1975). That doesnt begin to address the explosion of alternative investment solutions, and the continuous evolution of more open markets globally, all contributing to a geometric increase in the number of possibilities for investments and the complexity of picking the right ones for you.

The result is sometimes we settle for picking rather than choosing. The distinction (as identified by Barry Schwartz in an excellent book, The Paradox of Choice: Why More Is Less) is that picking is a reflexive activity grabbing something and hoping for the best as opposed to taking the time to own some thinking behind a decision.

I dont know about you, but when I consult with a client on an investment decision, I certainly want them to have (at least some) ownership of the decision, even though they may have relatively limited underlying knowledge of the details.

The Economist article also cites research that has become known as the Jam Studies by Sheena Iyengar and Mark Lepper. Perhaps expectedly, when shoppers were provided more choice (24 jams versus 6 at a sampling table), more stopped by to sample. However, when it came to buying, 30% of those who stopped at the 6 jam table bought the product versus only 3% at the table that had 24. Thus, more choice seemingly inhibited the shoppers decision making capability.

This article reminds us (as advisors) that

  1. Know your client goes beyond a regulatory rule. It is fundamental to our ability to serve them by understanding their preferences and decision making styles. We only get there by continuous client discovery in conversations and periodic psychological probing.
  2. Less is more in that fewer choices and concise representations enhance their ability to choose.
  3. Less (for clients) requires more (from advisors) in that distilling the boatload of information we want to cover into the half dozen or so decisions for each meeting requires a good bit of mental grappling. We need to allow ourselves sufficient processing time to prepare for meetings including some analysis of why each alternative is uniquely appropriate from the clients perspective. (consider the questions available on our Financial Values Questionnaire).
  4. Annual engagement planning allow us to deliberately sprinkle and pace decision sessions over time, thus more adroitly drive the education and focus on priorities for each meeting such that specific decisions might be reached more efficiently.

Happy choosing


Saturday, January 15, 2011

Who Made Money from 2000-2010? The Personality Traits of Successful Investors During the Stock Market's "Lost Decade"

Given the tumult of the market over the past decade, and the fact that such markets are likely to be a norm of sorts (although we believe the current bull market can continue for a long while before the next downturn), we thought it would be a good time to see what YOU, our readers and clients could teach us about how you crashed, survived, or even thrived over the past decade.  In particular, we wanted to know how WHO you are has affected your investing, and how that may have contributed to your performance.

We prepared a 7-page white paper about the traits of successful investors based on results from 2,600 investors who took our investing personality test from 2005-2010.  You can access the paper here.  I hope you find it as fascinating to read as it was to research.  The abstract follows.

"While much has been written about the economic toll of the 2008-2009 financial crisis, few studies have examined the psychological traits of those who thrived in the financial markets of the past decade. Over the past five years data on investment performance, risk management, and behavior was gathered in conjunction with an online personality test on the website In this paper we are reporting the results of 2,600 individuals who took the “Investing Personality Test” from 2005-2010. The Investing Personality Test includes 60 items from the IPIP-NEO, an open-source personality test based on the “Big Five” factor model. After completing the 60 items, investors who took the test disclosed financial statistics including their prior five year investment returns, largest loss in the prior five years, and made decisions in a series of hypothetical investment scenarios. The authors are publishing these results as a contribution to financial and investment educational programs. Our wish is that the results of this research may help more investors thrive in the coming decades."

You may download the paper here:

Please contact Richard L. Peterson MD with questions or comments about this study at [email protected] (beware strict spam filter) or +1.310.573.8523.

Happy Investing!

Monday, January 10, 2011

Building Mind Muscles(tm) for Market Profits

The markets are the markets. There is nothing most of us can do to change them. It is difficult to change the behaviors of people we know well, let alone the masses of people who affect the market daily.

But there is one thing we can change, and that is our financial decision process.

This series of blogs will look at new behaviors we can create that give us additional investing and trading choices that impact our risk and profitability. The foundation for these Mind Muscles is an earlier blog that can be read at:

Each blog will look at a new mind skill or Mind Muscle that will give you a new positive process.

Awareness Mind Muscle

Awareness is the foundation for improved market responses. Our brain has established neurological patterns that take the path of least resistance when we want to take an action. These patterns are well established, often created under stress to help us survive. Even these patterns represent behaviors that are not useful to us, we find it difficult to change. Some of these examples you may recognize...exercising more, eating better, following your trading system or stop procrastinating.

Awareness is the foundation for behavioral change because it allows us to slow down the habitual neural response and make a conscious decision and create new neural patterns that serve us better.

Awareness is like a muscle. It can be built and expanded and accessed in real time with practice. To get to this place of improved response in the financial markets, we need to build the Awareness Mind Muscle. Like going to the gym, this exercise is one way to build the awareness muscle.

Awareness Alarm Exercise

When you are doing your financial work, set an alarm for 20 or 30 minutes. You can do this on your smart phone, computer or with a kitchen timer. You are likely to forget about the alarm by the time it goes off. When it goes off, become aware of the following:

Your thoughts: What were you thinking about when the alarm went off? Were you lost in the flow of work? Were you telling yourself a story? Were you listening to a critical voice?

Your emotions: What feelings or emotional tone were you experiencing? Pressure? Stress? Joy? Sadness? Anger?

Your physical sensations: What sensations were present in your body? An easy way to do this is take a trip from your toes to your nose.

Now, take a spreadsheet, table or piece of paper and write down what you noticed. In the left column, put the date and time. In the next column, put your activity. In columns 3-5 put your thoughts, emotions and sensations. At first, this may seem foreign and challenging. But with repeated practice, this gets easier and better.

As you fill in this table, you may start to see patterns emerge of the kind of thoughts, feelings or physical sensations you have. For example, you may notice when watching an investment or trade that has lost money, you may have a tight stomach, have critical thoughts, or feel angry. This is a great awareness.

I cannot emphasize this too much - whatever you become aware of is OK. Right now, at this stage, the goal is just to become aware of your process, with self-acceptance. If you find yourself being judgmental, self-critical, or comparing yourself to the imagined states of other as you catch your internal process in action, note that also! It is all OK. We are just gathering data much as an anthropologist who would be delighted to note the behaviors of a newly found lost tribe.

As you do this exercise, your resolution and distinctions will get sharper about your internal process. Eventually, you will be able to monitor your thoughts, feelings and sensations in real time. In later blogs, we will talk about changing behaviors to get what you want. But for now, don’t worry about change. Just keep building that Awareness Mind Muscle.

Richard Friesen

Director of Trader Training
MarketPsych LLC
[email protected]

Wednesday, January 05, 2011

Wise Men Say Only Fools Rush In...

... but I. Can't. Help. Falling in love with... You.

What's your "favorite" stock? Do you have one? Sure you do! It might be the one that's made you the most money. But it's more likely to be the one that makes you feel the best about yourself. Of course, often that's the same stock.

At the top of my list would have to be Coach (COH, NYSE). I've owned it for a while, and have been enjoying its 60+% gain in 2010. So when I had CNBC on one afternoon and I heard them mention my beloved, I naturally perked up. It was noted chartist, Carter Worth, saying about Coach, and I quote, "time to unload".

I'm trained as a psychologist so I'm introspective. (Horribly, painfully introspective...) As such, I noticed a subtle emotional reaction that went unverbalized. But if it were verbalized it would have sounded like this:

"What? No way! It can't be over! This stock is awesome. This COMPANY is awesome. It deserves a high multiple. Overextended, my arse! How dare you bad mouth my Coach, Carter Worth! How dare you, sir!"

A few seconds passed, at which point I had a reaction to my initial reaction that went something like this: "Wow. Where the hell did THAT come from?"

In fact, I have enormous respect for Carter Worth's opinions. (And his name. That's a really cool name for a stock analyst.) And he was saying something meaningful (and not altogether terrible) about a position I own. I should be listening and absorbing his comments, not attempting to swat them away. What gives?

It is important to recognize that when we make an investment in a stock, we do not make merely a financial investment, we make an emotional investment. And you'd better be able to recognize the nature of that emotional investment and its consequent EROI (Emotional Return on Investment), or you are at serious risk for losing your money.

What was my particular emotional return? There were a bunch. 1) This stock has performed well for me. (It makes me feel good). 2) I have recommended it (casually, non-professionally) to other people and it has done well for them. (It made me look good.) 3) During some pretty dark investment times, this holding was an equalizer that made up for other losing positions. (It redeemed me.) 4) You can even trace the roots back 30 years. When I was 10, my mother bought be a Coach belt. She said, "It's expensive, but it's worth it." She was right. It's lasted to this day and outlived numerous others bought after it. I'm serious. This is the Methuselah of belts. If I dropped 15 lbs, I could wear it tomorrow. (It impressed me.) 5) My wife loves their products and so she loves Coach too! (I can share it with people.)

(NOTE: I also know from taking MarketPsych's Investor Personality Test that I am an Extrovert. MarketPsych research shows that one of the biggest traps for Investing Extroverts is that they don't know when the party is over. Extroverts (like me) tend to be too optimistic at times and give back big gains by failing to take profits. Please see click above to learn more about yourself.)

But back to the EROI; should you feel angry or even slightly annoyed if someone says something you don't like about a holding? Of course not. It's a stock, not your wife (or for that matter your husband, your kids, or your faithful golden retreiver). If somebody wants to deliver a littany of shortcomings, flaws or generally negative "observations" about your wife ("she's ugly", "she's stupid", "she dresses like a colorblind prostitute") that person deserves to be interrupted with a punch to the stomach.

But if someone wants to critique or even badmouth your stock choice, there is never a reason to feel insulted or threatened. And if you do, that is a surefire indicator that you have something other than money invested in that stock. You've invested your ego and your sense of well-being. And THAT's what's really being threatened. It also means you're at serious risk for serving those emotional needs to the detriment of your financial needs.

And unlike your wife, the stock has zero loyalty to you. You can't marry a stock. Not even in California. This entity didn't swear an oath to love you through sickness and health 'til death do you part. So why would you confer such loyalty onto one? The stock doesn't even know you exist. And probably wouldn't care if it did.

So if you want to have a better 2011 in the markets, be aware of your own defensiveness. Listen to your gut. If it tells you you're being threatened or insulted, take notice. It's a sign you may have fallen in love with your stock and are poised to make a mistake that will cost you dearly. And feel free to check out our award-winning book, MarketPsych: How to Manage Fear and Build Your Investor Identity for more ways to master the markets.

-Frank Murtha, Ph.D.

"Dr. Frankenstocks"