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Fear > Greed

I think the first thing I learned in the first class of the first investment course I took in college was that “the pain of losing money far exceeds the joy of making money.”  To a college kid, it is hard to understand how the emotion of losing a thousand dollars is significantly worse than the emotion of making a thousand dollars.  After all, we were trained that emotions are out-of-place in the workplace and that a thousand dollars is just that – a thousand dollars and nothing more.  Of course, once the college kid loses his first thousand dollars, then he understands!

I thought about that old lesson yesterday as I reviewed some research on market behavior.  During the twenty-year time period of 1991-2011, the market moved 10% or more on 51 different occasions – up 26 times and down 25 times.  The average length of time to go from the trough or low-point to get to the peak or high-point was 224 days.  However, going the other way, from the peak to the trough, it only took 55 days on average.  So, that was 224 days to get to the top and only 55 days to get to the bottom.

Why are falls so much much quicker than rebounds?  Because investors cannot take the pain of losing money and they sell in a panic.  Of course, this type of behavior absolutely drives investment advisors crazy, but it is normal human behavior.

Wall Street pundits like to say there are only two emotions on Wall Street, i.e., fear and greed.  The next time you feel fear, don’t forget you will again feel greed.   Recognize that your normal human behavior will only hurt your investment returns — after all, you are human, aren’t you?