The ‘What the Hell’ Effect
The ‘What the Hell’ Effect
If, by chance, you are served an unusually large slice of pizza, compared with what others appear to be getting, would that experience incline you, some minutes later, to eat more cookies or fewer when platefuls came your way? That depends, it turns out, on whether you are on a diet. Those who are not eat fewer cookies, whereas those who are see the excessive pizza as a licence to pig out. It is a demonstration of what Janet Polivy, a psychologist at the University of Toronto, refers to as the “what the hell” effect—a phenomenon familiar from real life to which Dr Polivy has given scientific respectability, most recently in a paper published in the latest edition of Appetite.
That’s an extract from this piece in The Economist. It got me thinking about the impact of the ‘what the hell’ effect on investors. Many investors work hard to establish a framework, system or set of principles which they believe will serve them well in the investing world. Then, when something goes wrong, or the market crashes, or they slip up just once, the discipline and hard work get thrown out the window. It’s so easy to fall back into the habits of old, and before you know it one slip-up turns into a series of compounding errors.
I do have my doubts about the results of the study. People on a diet might be more susceptible to pigging out on cookies to start with – that’s why they need the diet. Perhaps it’s the same with investing.
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Usually when I have a slip up and one the companies I hold take a turn for the worse, when I look back it is usually because I have moved away from my framework or system. When I think about it, I find it is usually because of some stupid emotional reason, fear, greed etc. That is my 'What the Hell' Effect, as in 'What the Hell was I thinking'. Not quite what you were getting to, but what came to mind reading your post.
When the market crashed in 2008, I had to question all my assumptions. It was frustrating that all the research I did on companies didn't matter, everything just kept going down. However, I didn't throw all my systems out the window. I didn't sell, and the good companies did come back to a more reasonable value.
So The Intelligent Investor is like a diet for capitalists - cut all the bad companies out of your life!
Perhaps an inexperienced investor (like yours truly) make take a "what the hell" approach after a few losses but that investor will become much the wiser for his actions and will benefit from the experience in the long term. I don't believe that an investment strategy should be so regimented that it is like a public service protocol and no one is game to step outside the norm occassionally to take advantage of oppontunities.
I actually think a great many investors start with the best of intentions and see things not go their way, and then have a What The Hell moment that turns into either go-crazy or get-out.
There are a large number of burned investors who have got out of the market, waiting for things to come good again. What they don't realise is that its the discipline of sticking to your principles that sets you apart.
Their "what the hell" turned into "I will wait for constantly rising market again" - which may not happen for some time. The best time to be buying is when those people are too scared to move - and they lose out as a consequence.
After being in the sharemarket for close on 25 years, there is only ONE rule I know of that is certain:
"Something will change"
This applies to everything. That company you have been waiting to buy for 8 years but its been too expensive. Keep waiting. Something will change and your chance will come.
All that research, ideas, frameworks, etc, is all changed by external factors. For example, when there is a recession, or the next GFC comes along - its like the sea moving - all boats get lowered. This does not mean your system or principles were wrong, its just one of those things to grin and bear. And use to your advantage when others are full of fear.
These days I tend to pay far less attention to the noise in the market, GFCs, and so on. And I don't very often sell. (Every sell bar one that I have ever made turned out to be a bad decision). These days I tend to accumulate stocks if it makes sense to do so, and try and hold them forever. Some will wither and die, and thats the price I'm prepared to pay. This approach tends to avoid "What the hell" moments.
I tend to follow your style of investing (hanging on-- sometimes too long) but , like you, I think that is the style I am most comfortable with. I look at my overall holdings, not individual stocks. At the moment, I have some losers, but I feel that my overall portfolio is sound.
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