Kirk Greene: Navigating the Psychology of Investing for Long-Term Success | Homes & Lifestyle

“Baseball is 90% mental. The other half is physical.”
— Yogi Berra

I started my first year of college as a psychology major. Soon I began to consider the financial side of career choices, and unless all the years required to earn a Ph.D. was in the cards, it was time to change majors to business/economics.

Looking back at my career in financial advising, I find that a significant portion of my work was as an amateur psychologist.

In the words of Yogi Berra, 90% of my work turned out to be mental, the other half was financial.

Over more than four decades, it was my privilege to learn from some amazing people — some very well known, others not so much, but all great minds.

What struck me most was that while there were a lot of very smart people in the investment world, there were not very many who I felt were truly wise.

So, I thought it would be fun — and, hopefully, valuable — to share some of the more insightful ideas that were shared with me over the years.

Art and Science of Economic Forecasting

Economist John Kenneth Galbraith once said, “We have two classes of forecasters: Those who don’t know, and those who don’t know they don’t know.”

It is commonly joked that there are no one‐armed economists because they all say “on one hand … but on the other hand.”

While economics is considered a science, it seems clear there is an awful lot of art in the process, too. So be careful when trying to make investment decisions based on economic forecasts.

Tim Buckley, chairman and CEO of Vanguard, has said, “Over the years, I’ve found that prudent investors exhibit a common trait: discipline. No matter how the markets move or what new investment fad hits the headlines, those who stay focused on their goals and tune out the noise are set up for long‐term success.”

The prime gateway to investing is saving, and you do not usually become a saver without a
healthy dose of discipline.

Savers make the decision to sock away part of their income, which means spending less and delaying gratification, no matter how difficult that may be.

Of course, disciplined investing extends beyond diligent saving. The financial markets — in the short term especially — are unpredictable.

I have yet to meet the investor who can time them perfectly. It takes discipline to resist
the urge to go all‐in when markets are frothy or to retreat when things look bleak.

Staying put with your investments is one strategy for handling volatility. Another, rebalancing, requires even more discipline because it means steering your money away from strong performers and toward poorer performers.

Pitfalls of Market Timing

Patience — a form of discipline — is also the friend of long‐term investors. Higher returns are the potential reward for weathering the market’s turbulence and uncertainty.

We have been enjoying one of the longest bull markets in history, but it will not continue forever. Prepare yourself now for how you will react when volatility comes back.

Don’t panic. Don’t chase returns or look for answers outside the asset classes you trust. And be sure to rebalance periodically, even when there’s turmoil.

Whether you are a master of self‐control, get a boost from technology, or work with a professional adviser, know that discipline is necessary to get the most out of your investment portfolio.

“The idea that a bell rings to signal when to get into or out of the stock market is simply not credible,” the late Vanguard founder Jack Bogle noted.

“I don’t know anybody who has done it successfully and consistently. I don’t even know anybody who knows anybody who has.”

Value of Patience in Volatile Markets

Over the years, I have seen lots of research suggesting strategies for “timing the market” — some from prominent/widely followed investors. Like Bogle, I have just never seen one that actually worked.

The late Daniel Kahneman, a Nobel Prize-winning Princeton University psychology and public affairs professor, wisely said, “All of us would be better investors if we just made fewer decisions.”

Terrance Odean, a UC Berkeley finance professor at the Haas School of Business, spoke
at a conference I attended a few years back. Hr shared his studies on investor behavior based on data for 10,000 customers of a major discount brokerage house.

Odean found most trades (sell A, buy B) were unprofitable; that younger investors traded more frequently than older investors; and that men traded more often than women.

His conclusion was that older women are the best investors.

Interestingly, Odean said he did the same study twice in the United States, once in Asia and once in the Netherlands. All four studies produced similar results — consistent with Kahneman’s advice to make fewer decisions.

Berkshire Hathaway CEO Warren Buffett, the “Sage of Omaha,” is one of my favorite pundits with his pithy quotes.

Among my treasured Buffett words to live by are:

• “Beware of geeks bearing formulas.”
• “There seems to be some perverse human characteristic that likes to make easy things difficult.”
• “We simply attempt to be fearful when others are greedy, and to be greedy only when others are fearful.”
• “If past history was all there was to the game, the richest people would be librarians.”

Similarly, the late Nobelist Paul Samuelson, an MIT economics professor, commented that “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”

Over the many years, it was my advice that clients would be best served by building a
well‐diversified portfolio that was prudently aligned with their financial goals, time horizon and risk tolerance — and then to stick with it and ride out market storms.

Some clients thought this was pretty boring advice when markets get euphoric. And when markets fell, clients would often want to “do something … anything” — usually a different way of saying they wanted to sell when markets were scary.

I encouraged (sometimes begged) them to stick with their plan, reminding them that a decision to “stay the course” was still doing something.

The chart at the top of this column tells a pretty compelling story that suggests the merits of being a disciplined investor.

Each of these events came without much (or any) warning, and most investors would have already suffered a sizable downturn before even thinking about getting out of the stock market.

But as painful as it would have been each time watching your account statements show declining balances, hanging in there would have allowed you to enjoy the rebound that followed the downturn.

Recovery Timeline

In some cases, it took more than a year to recover. For example, it took a bit less than two years to recover from the 2008 Great Recession that began with an overheated real estate market and bad mortgages, and really got going with the Lehman Brothers bankruptcy.

But patience paid off each time. Those who sold out in panic realized losses — and then had to worry about if and when to get back in as markets recovered. There are many sad
stories about folks who panicked.

It has been my experience that most people need someone to help them ride out periods of significant market volatility — to avoid taking on too much risk when markets are on a tear, and to avoid selling out when they are scary.

The human brain is hardwired to run from scary encounters, and frankly most
of us are our own worst enemies when it comes to investing.

Vanguard research suggests that “behavioral coaching” can add up to 200bp (2%) in annual returns — and other studies suggest similar returns.

That can make a truly good adviser worth the cost. It can pay to get good help!