I’ll admit, I’m not Albert Einstein. Ok, so that’s not a big admission. Therefore, you might find my theory of relativity to be a little more prosaic, mundane, even concrete than his. Like the stuff you drive on every day. I’m talking about the road. And drivers. And their frequently peculiar driving habits.
Streets and highways are an interesting laboratory for observing human behavior. The driving habits that I observe on roads reminds me of the investment habits I see from Wall Street and Main Street investors alike-mostly rational, but occasionally bonkers.
For instance, on a recent morning, I was cruising along in the lane next to the fast lane. There were two cars in the fast lane about 200 yards ahead of me, one right behind the other, also cruising along at a steady speed. Suddenly another car flew by all of us. I see this daily, so I paid little attention.
But the driver in the fast lane–now in second place–suddenly decided that his car was just way too slow. He jumped out of the fast lane and in a split second stomped off after the speed demon.
Why did this happen? I had been observing behavioral equilibrium for several minutes, with each driver content to drive at a relatively rational and constant speed. But then new, unsettling information arrived, in the form of a speeder.
The new arrival on the scene made the guy in the fast lane suddenly feel relatively slow. The neural network in his head went bonkers and started barking “get going, compared to that guy, you’re a relative slowpoke!”
I see similarities in investing. Who hasn’t heard a boastful stock trader at a cocktail party bragging about how much money he or she’s made over the past 3 months buying XYZ stock. Which normal human emotions does that trigger? Jealousy? Envy?
Or you buy shares in a company selling at a very high valuation, and rationalize it because similar companies sell at the same pricey levels. Or the market declines, and you join the selling parade–since everyone is doing it, this must be the right decision?
All of these reactions are emotional, and emotions, from my perspective, can be a meaningful driver of investment outcomes. It’s perfectly normal and human to feel these emotions, but it’s important to recognize and control these temptations at the same time. Staying cool and focused on the long-term opportunities those occasionally bonkers stock markets can provide is a better way of looking at things in my opinion.
The relative game is, in the end, a dangerous game. As with driving cars at high speeds because “everyone else is doing it“, playing follow the leader can be dangerous to your financial wealth. I believe it’s better to have a plan, stay within the speed limit, ignore the speeders, and give them a wave after they’ve been pulled over by the equivalent of the financial police.
[us_separator size=”small”] This post has been excerpted from a recent issue of The Triad Perspective.