Thoughts On: The Yo-Yo Problem with Investing
The job of a professional money manager is to make people money. As difficult as that is, the job of the client service manager can be even harder. Client Service has to make people happy. I used to think that if we made people money, then they would be happy. I have learned we have to help people be happy long enough for us to make them money.
Out of necessity, I have formulated some ideas about helping people be happy about their investments. The most critical (and some might think the most obvious) lesson I have learned is that investing is just like life. We are each responsible for our own happiness. Financial happiness is dependent on the INVESTOR, not just the investment. If we do our homework, stick to principles that are tried and true, and remain patient, then we will be happy. We all KNOW this; we just don’t all DO this. Why not? Because we ignore what we know to be true and fall prey to what sounds and looks tempting.
It is tempting to focus on short-term price moves in stocks. Wall Street and the media have seduced us into watching prices go up and down, up and down, every day. If prices are down, we are unhappy. If prices are up, we are happy. It’s dizzying, and sometimes a little nauseating. We move our money around, closing accounts or refusing to add money until performance improves. We take money out of something that has been disappointing us just before it improves (usually dramatically) and put money in things that have done well just before they disappoint us (usually even more dramatically.) And we make no money in the process; we are just unhappy.
My mental picture is watching a man climb the stairs while playing with a yo-yo. If I focus on the yo-yo, I can get dizzy pretty quick. And if I watch the yo-yo too long, I can get sick to my stomach. But if I watch the man climb the steps, it is a relatively smooth progression. Whether I get sick or stay well all depends on my focus.
Not only does focusing on price swings cost money, but it also leads to regrets. We often regret something we did (or didn’t do) in the past to the point of neglecting what we can do NOW. How do we avoid having the SAME regrets in the future?
The way to prevent the regrets is to ignore prices. Focus on the fundamental reasons for making an investment in the first place. Is the company profitable and growing? Will it be worth more five years from now than it is today? Can I buy it/own it for LESS than it is worth today?
Finding the answers to these questions is more useful, and easier on the stomach, than focusing on the changes in prices.
The opinions expressed are those of Tony Muhlenkamp of Muhlenkamp and Company and are not intended to forecast future events, guarantee future results, or offer investment advice.
