Cashing in in 2010

A link to a fine article written by Bob Frick over at http://www.kiplinger.com/ on poker and investing - specifically how working on the former can greatly improve your skill in the latter.

The article features insights from MarketPsych's Frank Murtha, as well as from Daniel Negreanu, which - if you're a poker fan - is always at treat.

Fun and interesting stuff.

MarketPsych offers advanced coaching/seminars to traders, financial analysts, financial advisors, money managers as well.

If you want to get better at your game, give us a shout at info@MarketPsych.com for more information.

Cheers. And good luck in 2010.

Dr. Frank Murtha

Swine Flu: Don't Panic! (Seriously. Don't.)

A few years ago they terrified us with chicken.

In 2009 it's pork, bacon and ham. Once again, the world's tastiest creatures appear bent on revenge.

Yes, we have another potential pandemic on our hands, this one goes by the name of Swine Flu. And like most every medical scare, the response is all out of proportion to the facts as we know them.

Since Swine Flu touched down here in New York City, it's all people seem to want to talk about. And the media reports rather than dowsing fears, have predictably poured gasoline on the fire.

"New virus"... "no known cure"... "quarantines"... "stockpiling Tamiflu"... and now this "money quote"; "I fully expect we will see deaths from this infection." (Richard Besser, acting director of the CDC.)

Scary, right?

A little perspective is called for here.

Yes, there may be deaths resulting from the Swine Flu in the United States. There have been 150 deaths (at last count) in Mexico.

But there are ALWAYS deaths from an outbreak of influenza. (Sad but true) How many? The CDC estimates that complications from influenza kill approximately 36,000 people each year.

Thirty-six. Thousand.

Today I read "Fears of Swine Flu" were the reason the DJIA gave its gains back. If this episode seems like a repeat (perhaps of repeat of Quincy), it is. A few years ago it was Avian (Bird) Flu that captured the imagination of the media. It weighed on the necks of the world markets, like an infected albatross.

Let's check the stats on that "Superbug". In the last 10 years (according to the World Health Organization) it has killed 248 people (as of January of '09).

Look, I am not making light of Swine Flu. It has already inflicted horrible suffering on people. It is truly a killer and all out effort to combat it should be taken with the utmost alacrity.

But if people feared the mundane killers out there a fraction as much as they fear these inflated medical scares, they'd never leave the house.

My wife, (bless her heart) worries when I take a plane. "Let me know when you get you there, honey", "Call me when you get in", she says to me.

What I (wisely) no longer bother to point out is that the most dangerous part of my journey arrives after I get into JFK.

Flying is amazingly safe. So safe, that when something bad happens amidst the millions of flights that take off every year, it makes news. More than that, it IS news. Cars on the other hand...

You know what kind of flying isn't safe? Flying down the Long Island Expressway at night and weaving in and out of traffic on the Triboro bridge at 75 miles an hour, while your Russian taxi driver is screaming epithets at his girlfriend over the phone.

That's legimitately terrifying.

Turbulence? Piece of cake.

So let's not lose sight of the baseline here.

We have enough real economic indicators out there scaring us already.

Do we really need the Pig Flu torpedoing our rallies?

The Value of the Time Out

In the words of Dick Vitale... "Get a T.O., Baby!!"

The value of the time out to the investor and investors plural (i.e., "the market") is hard to exaggerate.

Whether it's FDR's famous "Bank Holidays," or suspended trading, or simply going for a long walk when you're tempted to make an impulsive trade, the "time out" is a major weapon in an investor's fear-fighting aresenal.

Why? Because fear FORCES us to think short term. It's simply the way our brains are wired. There is a sound biological/evolutionary reason behind this reaction.

When you're out gathering firewood for the cave and lock eyes with a large male Smilodon (read Sabretooth Tiger) who has just emerged from the glade, your brain simply CANNOT LET you indulge in thoughts like "what to wear to Zog's birthday party?" or "should I redo the cave paintings for the harvest season (antelopes are so "early pleistocene")?"

The Sabretooth has gone the way of the Dodo, but the evolutionary function remains. Intense fear still draws our focus on the here and now. As well it should.

This is where the time out can help. The ablility to take a break and regain our bearings (to "step out of the box" as Crash Davis would say) gives our amydalas a chance to stop firing. When that happens we can engage other parts of our brain. That's when we can pull up and out of the tailspin of panic. It's neurobiology. See Rich's critically acclained tome for more information.

This is, of course, the eternal struggle for investors: To pull out of the short-term focus and think big picture.

When we do calm our brains and revisit the situation, it doesn't mean our outlook becomes rosy. It just means we've given our brains the ability to reintroduce reason to our thinking processes - and perhaps a chance to spot the fantastic opportunities such crises produce.

A few days off may be just what the doctor ordered.

In the meantime, good luck out there, everyone.

Frank

Pressure Valve: Letting off Steam

Have you ever seen a steam pipe explode?

I did. I was in Boston driving down Boylston. I heard an explosion, checked the rear view mirror and what I saw looked amazingly close to the above photograph.

Market crises can create the investing equivalent of steam pipe explosions. Investors get caught between two competing pyschological forces that build up pressure:

On one hand, uncertainty causes indecision.

But on the other hand, when we are anxious, we naturally feel a need to do SOMETHING.

The result of these two psychological forces work against each other until -- Kaboom! -- the pressure becomes too much.

It's a vicious cycle and it goes something like this: Do nothing (and suffer), do nothing (suffer some more), continue to do nothing (suffer to the breaking point) then PANIC!!! (do something rash).

It's a wealth killer.

We need a way to let off steam, so that the pressure doesn't build to the point of explosion.

Now, let it be said that we don't give specific advice to investors here at MarketPsych.

Nonetheless, there are some tricks that people often employ to relieve the pressure.

One of the best pressure valves we have is to sell a small percentage of certain positions to free up some cash.

This works on a financial level, but more importantly it works on an emotional level.

Why does it work?

1) It fulfills a deep-seated psychological need to do something, to take back control of our lives.

2) It creates something safe. It lets us know that at least part of the money that was at risk, is now safe. We have less exposure to pain.

3) It gives us freedom. We now have money that we can put to work on our terms. Emotional forces can no longer compel us to sell what will we have already willingly sold.

4) It's a hedge against regret. We all have the same nausea-inducing fears of regret: E.g. "The moment I sell, the market will bottom out" or "It's going to keep going down, and I'm going to hate myself for riding it to the bottom." Selling a small percentage mitigates this crippling fear.

5) It allows us to reframe crises as opportunities. We know that market panics create opportunities. The problem for so many people is they simply don't have the cash available to take advantage of those opportunities. The ability to engage other parts of our brain is another fear-fighting tool that helps put investors back on a healthy investing track.

How much is enough? 1%? 5%?... 20%? Only you can decide. Sit down with your advisor and see where you stand.

If you would like more information on our trainings, please feel free to contact us.

In the meantime... good luck out there.

Frank

Nice Call, Master Yoda

Market: I'm not afraid!

Rich: You will be.... you. will. be.

Regarding your previous post, you may not have to be worried about the absence of fear for long.

The MarketPsych Fear Index has seen an uptick recently.

One reason I believe it has meandered of late is that a critical and catalyitc component was missing: The appearance of a nightmare scenario that the individual can; 1) experience viscerally, and 2) consider credible.

The Bear Stearns news today presented just such a scenario, and it sent a shockwave of fear through the markets.

We simply do not live in a world where "Modest CPI Numbers" can compete with "Wall Street Institution Imploding Overnight" in a market-moving contest.

If it sets off a "fear cascade" (think dominoes), we may just see Market Panic make it's first reappearance in years.

Getting my cash ready now...

How To Scare the Pants off an Investor

Fear may drive the markets. But when it comes to scaring investors, most people are amateurs.

Take all these doom and gloomers you see on TV. I bet they think they're reeeeeeally scary. With their "GDP numbers" and their "recession forecasts".

"Well, Sue, it's pretty bad out there. In fact, we've upped the likelihood of recession from 45% to 52% by Q2." (Pause for reaction).

Is that supposed to scare me? To you, I say, "Ha, would-be fearmonger! You've got nothing! I've seen Barbra Streisand movies that are scarier than that!"

(Actually, I find all Barbra Streisand movies utterly terrifying... perhaps that's a bad example)

You know why their analysis isn't scary? Because it's not emotion... it's math. I mean, you're not even engaging the right part of the human brain! (Dr. Peterson's opus is the definitive source on that subject).

"Uh, wait. There's a 52% chance of recession... but only a 76% chance of that. And that's only if LIBOR drops under 4%... Hold on, let me get my calculator." I mean, honestly.

Math is only scary when you're in 5th grade and are asked to go up to the blackboard and do long division problems in front of the class (and you know Mrs. Schecter picked you because she caught you passing notes to your buddy, Rob earlier in the day).

You want to know how to really scare the pants off investor? You want to really know how to get the stampede started?

First off, ditch the math. The odds of experiencing a loss don't scare people; it's the amount of that loss that scares people. This is the first crucial step toward sewing fear. Ever seen that show, Deal or No Deal? (e.g., I know my odds, but I could lose a guaranteed $300,000). It illustrates the difference beautifully.

And it's not just the degree of loss. Even that's still numbers, and number is the language of math. It's how those numbers will impact the quality of the investors' lives that generates the fear.

Investors have to imagine what they will feel like when the loss changes their lives. That's what turns their stomachs.

Also, fear is personal. You want to scare investors? You gotta make it personal.

You pictured sending your beloved son to an Ivy League School. You pictured walking across the quad and soaking in the beauty of the gorgeous Georgian style buildings and 300 year old Elm trees. How proud you would feel. Nothing but the best for your son! But...

There's no way you can afford that now. Your vision and his dream have been crushed. Instead, imagine the sense of shame and longing when you pull up to that shabby dorm at the state school with it's ugly utilitarian architecture. The best companies barely even recruit there. He'll never get the opportunities there you envisioned for him.

(MARKETPSYCH LEGAL COUNSEL DISCLAIMER): State schools provide excellent educational experiences. The quality of education is often superior to that of private colleges. In fact, Marketpsych founders have attended public schools, proudly. Moreover, many state schools have lovely campuses. They are not necessarily ugly or utilitarian, with the exception of the State University of New York at Buffalo's Amherst Campus which was apparently outsourced to the Soviet Ministry of Architecture in 1971.)

Not scary enough yet? Fine. You know that 0ctogenarian who was behind the counter at that chain book store? Remember the twinge of pathos you felt? Well guess what? You're going to be that guy because you can never afford to retire. Every morning you will put on your uniform, get the bus to the mall and spend all day on your aching feet squinting at book prices because your eye sight "isn't what it used to be". At lunch you will get a half an hour to eat the bologna sandwich you made that morning. You will be doing this the rest of your life.

I think we're getting warmer.

Lastly, add some regret. (i.e., And not only did this awful thing happen... but it was all your fault!)

Of course, different investors imagine different worst case scenarios. But we all have them. Wheyn you create the connection from how their investing loss would lead to that terrifying reality, and the investor actually pictures themselves in that situation and feels what it would feel like... that's when you really.

Fifty-two percent chance of a recession?

Whatever, math-guy.

Talk to me when we get to the catfood.

THE EROI (Emotional Return on Investing)

Has this ever happened to you?

Recently I sold half of a position (large drug company) that I had held for 5 years. Did I have a good reason? Not especially. I figured that as a solid company it was wort owning - I just didn't need THAT much of it.

But - as is always the case with Whack-A-Mole Syndrome (TM) - it immediately started to move up. In fact, it almost seemed that the stock had become aware that I had sold it and used that information as the catalyst to move up 3 percent over the next two days.

Then something weird happened; I found myself rooting against it.

As a rational, self-interested being I was struck by this reaction. After all, since I still owned the stock, every move higher was making me money. But every move up was also a stinging rebuke of my in retrospect completely arbitrary decision to dump half my shares. This resulting conclusion was inescapable; I literally found myself wanting to lose money.

Why would an investor ever want to do that??

It's simple. We invest for an emotional return that more important even then the financial return. In fact, money is never the goal of investing. It is the means to the end, a currency that buys us emotional states (e.g., feeling safe, feeling proud, feeling free).

Unfortunately, sometimes our emotional goals and financial goals are imcompatible.

Being aware of our secret reasons for investing The E.R.O.I (Emotional Return on Investing) is what helps us overcome our psychology and navigate through the emotional mindfield of equities investing.

Are there any times you felt yourself actually wanting to lose money? Feel free to post a response.

In the meantime, happy investing.

Oh! And check out Dr. Peterson's cool book for more great insights into how to become a better investor.

Market Fear: The Poison and The Antidote

If behavioral finance teaches us one thing, it is that Fear trumps Greed. In fact, it's not even close. Fear is like the Harlem Globetrotters playing the Washington Generals. Sure, ostensibly it's a real contest, but despite the ups and downs along the way, we always know who's going to win in the end. The outcome is predetermined, inexorable.

(Authors Note: I used to use the Yankees and the Red Sox for this analogy. But then David Ortiz hit that home run off Mariano Rivera in 2004 and rendered my metaphor obsolete. A pox on your house, Red Sox Nation!!!)

Fear drives the market. Why? Because losing hurts more than winning feels good. Because the future is uncertain, and the default emotion in cases of uncertainty is fear. Because you're not paranoid, the Market really is out to get you, and fear is the greatest weapon in the Market's arsenal.

How do we fight our fear? With "reason"? Well, some people do. And by "some people" I am chiefly referring to Vulcans - the supremely rational beings from the eponymous planet who are not afflicted by such human weaknesses as emotion. (Then again, Vulcans mate only once every seven years, so you can see why emotions could be a big drawback.)

No. For most of us on Planet Earth, we are forced to fight the battle on an emotional level. Reason definitely helps, but only so far as it helps us reacquire our emotional equilbrium.

Fear is a poison. But there is an antidote - Control. Not actual control (which is irrelevant) but the belief that that you have control. Fear beats Greed. Perception beats Reality - at least where our emotions are concerned.

We have seen this play out recently on marketwide level with the recent actions of the Fed Charmain, Ben Bernanke. The market flagged due to fear. (It always does due to fear.) But the fires of fear were stoked in large part because one of the main sources of investors' (sense of) control is the Federal Reserve Board.

After months of hearing "Inflation remains our primary concern", investors began to wonder if the esteemed Dr. Bernanke really "got it". The Market was saying; "Does he understand our concerns? Does he even care?"

Investors were riding shotgun with the Fed Chairman on a dangerous road. They were concerned there may be a cliff up ahead, but they were even more concerned that the Fed Chairman was asleep behind the wheel.

The first shot of control was injected back in July when Chairman Bernanke acknowledged that the mortgage crisis (and credit crunch) were on his radar screen. (Whew! He's not sleeping after all.) The second shot of control came when he lowered the discount rate. (He's awake and he's willing to hit the brakes.)

People called his decision to lower the discount rate a "largely symbolic move". Exactly. Symbols are important, especially when the symbolic gesture tells people, "Relax. I'm on it".

The Market has been calling (or is it whining?) for an interest rate cut. And I, for one, think that would be splendid. But investors got something even more important. They got back their sense of control.

It's like the immortal words of Mick Jagger:

"You can't always get what you want, but if you try sometimes, you might find you get what you need."

Bernanke's awake. It'll do for now.