Investing Behavior

I have long studied the stock market and enjoy the quantitative nature of technical anlaysis - charting, forecasting, modeling, trend analysis... the list is infinite.  I'm not a day trader, but  my frequency of trades is apparent in the average number of days of my combined portfolio.  The constant battle between fundamentals and technicals, allows me ample opportunity to analyze the macro and micro nature of the economy endlessly. 

But it is the emotional side of investing, that has also intrigued me.  Consequently, I have 20 volumes of notes and research from Oct 4, 2004 to today.  I use these notes to review when I need a "cooling off" period during fear or greed.  I started these journals to force the discipline of time between  my brilliant idea and  any resulting trade.  Also I started these logs based on the advice of a smart financial mutual fund manager - Ralph Wagner.

I remember a seminar set up by my financial advisor (T.A.) where Ralph Wagner (who was retiring from the Acorn Fund - 2003) was speaking.  He mentioned the research team at Acorn and one of the key data fields they used in their research database - "why you bought the stock".  A mistake many people make is that they forget the source of why the stock was purchased in the first place (they always remember the purchase price but not the purchase reason).   

If Uncle Joe gave you a "hot stock tip" - that may be a valid source.  But too often you don't monitor the reason.  Six months later you see Uncle Joe and ask him about the stock (which has tanked), only to discover Uncle Joe sold his position three months ago at a profit.  Lesson #1 - Write down your reason for buying.  Lesson #2 - Monitor your reason for buying. Lesson #3 - Sell when your reason is complete (right or wrong).

Too often, I abuse Lesson #2 (remaining in an infinite loop) and develop spreadsheets of the opportunity gain or loss of any decision (buy or sell) that I made.  For example on July 15, 2011 - I called my Financial Advisor to move 25% to cash (against his advice) because of the congressional vote about the debt ceiling and the impending downgrade of the U.S. debt rating (I got Lesson #1 down on paper).   That decision turned out to be correct  (I watched the congressional proceedings - Lesson #2) but I failed on Lesson #3.  In fact my cash still sits (now with a 4% opportunity loss) idle with a new reason - modified by my emotion of wanting to be "more right" missing the low of Oct 4, 2011 (avoiding a 22.5% loss). So I watch each day the "result" of my intial decision - frozen in action, as that decision goes from right to wrong to right to wrong to ..........

I've always said the "Stock Market is the best place you can always demonstrate how suboptimal your decision was .. and infinitely second guess your daily decisions to buy or sell"

This caused me to develop my own Carl Richards (Author of "The Behavior Gap") sketch about how I feel most of the time: