Developing an Investment Discipline That Will Achieve Our Goals—Continued: The Stock Market Is a Tug-of-War between Fear and Greed; Arm Yourself with the Tools to Succeed

One of the first things every investor learns is not to take themselves too seriously. Arrogance is the first step down a slippery slope to potential portfolio losses. Just when we think we know all there is to know about a company a new technology is introduced and today’s industry leader becomes yesterday’s innovator. My colleagues and I used to call it the buggy-whip factor. No investor (or company management) wants to get caught making buggy-whips for a horse-drawn carriage on the eve of the invention of the automobile. Overconfidence or dependence on dogma too frequently results in unfortunate surprises. Because one of the most popular market investing dogmas is to assume the stock market is rational, pundits and researchers chant the maxim like a mantra. Yet I would argue (and behavioral economics seems to support me) that efficient markets exist only in theory. That people—who comprise the market—don’t always make decisions based on rational, fact-based criteria. If we remember that the stock market is a tug-of-war between fear and greed, we will be much more likely to moderate our response to market swings. Any mother who has ever muttered the words, “My child would never do that” has likely come to regret the statement because inevitably her child does the very thing she decried.