Shiny Objects
I focus a lot on the pain of investing because of a cognitive bias known as loss aversion.
Loss aversion tells us that the impact of a loss is felt more intensely than the joy of an equivalent gain. Daniel Kahneman, the authority in behavioural investing, suggested the negative impact of losing something is psychologically about twice as powerful as the positive impact of gaining something of equal value.
Tennis great Andre Agassi summed up loss aversion best in his autobiography when he wrote: ‘a win doesn’t feel as good as a loss feels bad, and the good feeling doesn’t last as long as the bad. Not even close.’
I’m not talking about investment pain today, though. Today I’m talking about investment pleasure.
I’m writing this on July 1st. The American stock market (S&P500 index) just hit a new record high. It’s up almost 25% from its April lows (remember how ugly things looked back then?).
Whenever the market goes on a tear like this, Shiny Objects are either put on a pedestal or mess with our minds.
‘If only I’d bought stock ABC in April, I’d be up 50%!’
‘Company XYZ was down 70%. Now it’s up 300%. Easy, right? Just buy beaten up names.’
‘Someone told me about an investment that is going to grow even faster and be less volatile than both ABC and XYZ.’
Beware these Shiny Objects.
I don’t know who coined this one, but if you’re excited about an investment, it’s probably not a good investment.
Our client onboarding process is detailed. I’ve written about it a few times and you can read about it here if you’d like. We purposely don’t dwell on the investment process during onboarding. Not because it’s unimportant but because it’s repeatable and simple. What matters more is how we react when things get either uncomfortable or too comfortable.
The speculative fever of 2020 and 2021 was more difficult to manoeuvre than any bear market. Late in 2020, when every stock went straight up, I had a client get mad at me. His 19-year-old son’s investments were doing better than his. But by 2022, the son’s investments were worthless. (Side note: watching your ‘great’ investments evaporate early in life is one of the best ways to learn how to invest.)
Where am I going with this? Last week a potential client asked me what kind of returns they should expect working with me. I told him, ‘It depends on how much of your money is allocated to stocks versus bonds versus cash, but here’s what history tells us for an appropriately diversified Canadian investor willing to accept moderate volatility.’ I then told him what history tells us.
He scoffed at that. ‘Vince, you’re not the only advisor I’m meeting with. I was told by two other advisors that I should expect (a highly unlikely possible return).’
‘Fair enough. Tell me, what type of investments are they offering? Are they stocks, bonds, options? What’s the process? What about your tolerance for volatility? How volatile are these investments?’
He couldn’t tell me. He just knew the returns sounded better. Risk comes from not knowing what you’re doing.
That’s what happens when the market is on fire. Shiny Objects shine bright. Until they don’t.
Give us a shout if you want to know what history tells us to expect. And what typically happens to Shiny Objects.
