MarketPsych Alert: Investors at Risk for Classic Investing Mistake

(First off- it you haven't read THIS , we invite you to do so. For one thing, it is so scarily accurate that you will not only want to subscribe to Dr. Peterson's Data Service, you will want to rent him out for parties. For another, it contains wisdom and stick-your-neck out prognostications for what to look for next.)

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Would you rather have flowers in your garden or a bunch of gnarly weeds?
Obvious answer, right?

Not so when it comes to investing. And at "crisis points" like this one (markets down another today and fear is getting higher than Timothy Leary at a Grateful Dead concert ), it puts investors at risk for one of the biggest investing mistakes.

When the market is as scary as it is right now, there's always a temptation to sell. Perhaps to avoid further losses, or maybe just to have more cash available to go bottom fishing when the dust settles.

(MarketPsych Note: The above sentence has just been voted the single worst mixed metaphor in MarketPsych Blog history.)

Awkward phraseology notwithstanding, at times like this many investors will look to liquidate some stocks to free up cash.

The temptation will be to sell the stocks in which you have the biggest gains. Here's the problem.

The stocks that have performed well have done so, because they are BETTER stocks. There may be exceptions, but stocks that go up are by DEFINITION better stocks than those that don't.

Here's MarketPsych's internationlly famous "Wicked Gardener" Analogy.

Your portfolio is a garden. Good stocks are blooming flowers. Bad stocks are weeds.

Many investors free up cash at times like this by clipping those beautiful flowers and holding - or in some cases watering (i.e. buying more of) -- those weeds.

By doing so investors systematically clear out their quality holdings, ensuring that what remains in the portfolio are lower quality, worse run, worse performing companies.

Be aware of not only of this temptation, but also the underlying motivation. When looking at positions to sell, ask yourself this; are you chosing the stock because it is the one you should going forward? Or are you really selling a stock because it hurts less than realizing a loss on a position? And be 100% honest.

Because if it's the former - good for you. If it's the latter, well, we can relate, but protecting your feelings comes at the cost of protecting your money. It's a recipe for long term investing failure.

So I'll make a deal with you:

You do what's right with your money.

I'll work on my metaphors.

And hey... let's be careful out there.

-Dr. Frankenstocks

Frank Murtha, Ph.D.

DOC HOLLIDAY...

... Just winked.

I commented on this on last night's Nightly Business Report, but the debt crisis has revealed a fascinating an unforseen shortcoming of the Market.

But first some perspective. Do you think for a moment that if we decided to raise the debt ceiling quietly and without any fuss that the markets would have blinked? I mean, it's been raised 74 times since 1962. Ten times since 2001!

What? Is the 75th time the charm?

Of course not.

And it's not like our national debt snuck up on us. A few miles away from me at Union Square there's a gigantic COUNTER revealing the national debt up in real time.

So what's the big fuss? Why did people, who could have shouted "DOWNGRADE!" in a crowded market any time over the last few years, pick this moment?

Here's the dirty little secret: The Market can't focus on EVERYTHING.

It just can't. The Market (i.e., the investing public) doesn't have the mental bandwith to factor in every variable. So it can only focus on a few issues at a time, usually the ones that appear most urgent or emotionally charged.

Avoidance works. And a problem isn't a problem until we decide it is. That's what makes a bubble. A whole bunch of people decide to ignore a problem... until they don't.

So instead of getting a relief rally for defusing the debt-ceiling time bomb with 1 second left on the clock, we got a renewed attention on some significant problems. The rose-colored glasses are off... the shades are on. And they have given people a dimmer view of our plight.

It's actually quite ironic if you think about it.

If we had chosen to raise the limit and ignore the problem - just as we've been ignoring it for years - August 2nd would have come and gone without incident.

When we decide to, you know actually address the problem for once... we are "at risk for a downgrade".

Hardly seems fair, really.

MarketPsych's Co-founder and resident genius, Dr. Rich Peterson, has a fascinating post below on what the implications may be. We invite you to check it out.

In the mean time, happy investing.

And hey... let's be careful out there.

(Seriously.)

-Dr. Frankenstock

Frank Murtha, Ph.D.