Short-Termism: it’s more contagious than the flu

flu-vaccine-foxnews-628x363Flu shots are now available. My kids got them last week. It’s just a matter of weeks before someone in my family contracts the virus, spreads it to other members of the family and eventually to the entire school. (Hey, caring is sharing, right?) We know the flu is very contagious. We have shots that immunize us from what are believed to be the worst strains of flu. Yet there is something even more contagious that permeates our being on a daily basis, irrespective of season. That is the infirmity of short-termism.


The Symptoms of Short-Termism

Short-termism causes people to think and act based on what gives them pleasure today, and not consider future consequences. “Sure I may not be able to fund college education for my kid, but that is far off and I can get this really nice car today. I will be able to make up for it in the future.” We overweight the benefit today and underweight the future cost of our action. This is also referred to as instant gratification. Economists classify this as having a high discount rate.

Investors are drawn to the news story of the day (or week) and are influenced by recent stock market movements to do something. Investors suffering from short-termism trade based on short-term outcomes at the peril of their long-term goals. They no longer care about the long term, they only care about the right now…making “adjustments” so they will feel more comfortable with their investments. If you are investing based on how you feel, then you are investing emotionally. Sure it feels good and is easy to do, but has some significant long-term costs…which you may be ignoring.

DALBAR, Inc, Morningstar, JP Morgan (and I am sure others) have found that investors suffering from short-termism do significantly worse than a simple buy and hold strategy.

The Contagion of Short-Termism

So short-term thinking and acting is clearly not in our best interest. Just like getting the flu is not in our interest. So we need to stay away from those that spread the infirmity. Those infected with short-termism may include friends, family member or fellow workers. But the real culprit is the financial media.

What Will Move MarketsFor what purpose is the financial media in business? To make money. It relies on advertisements to make money. And they need you to tune in. So, it is in their best interest to get you to tune in today, and make sure you come back tomorrow. How do they do that? It is rare when news is actually newsworthy. Most of the time it is noise, elevated to the perception of news because they need to fill their time slot or pages. Daily stock quotations are noise. What caused the market to go up or down today is noise. Predictions about the future is noise (mainly because predictions are wrong as often as they are right). The elevated voices and emotional outbursts are noise. The story isn’t that important, despite what they are telling you. It is just important that you tune in.

One Year Ago Today

Do you remember the huge (or as Donald Trump would say, “yuge”) crisis we had last October? Over the last several weeks I have asked this question to about 500 investors. Less than 10 correctly identified the Ebola crisis. How could we have forgotten about this? During the crisis there was a lot of fear. You could not turn on the TV without seeing pictures of people in hazmat suits. Markets sold off about ten percent and even President Obama named an Ebola Czar. Yet, just like many crises, this went as quickly as it came. Investors that acted on the influence of the media found themselves making a very costly error.

Delay Your Response & Consider the Consequences

So what should you do when you feel the urge to do something? The media knows how to stimulate our biases and urges to act today. Their business model relies on it. If you don’t tune in (along with your neighbors) they take a financial hit.

If you feel like making a change to your portfolio or investment strategy, especially if it is an impulsive response to the news or events of the day/week/month, the best strategy is to delay action. Delay allows time for you to consider the consequences (positive and negative) of various possible decisions. Make a pro/con list. A delay allows you to engage the cognitive part of your brain. And it is always better to invest thoughtfully than emotionally. We just need to give time for the thinking part of the brain to respond.

The Emotional Investor – An Amazon Best Seller

Screen Shot 2015-08-28 at 11.36.59 AMMy book is out and available on Amazon. Thank you to all who have ordered and made it an Amazon Best Seller. This is an easy read that “coaches” investors on how to think more deliberately about their investment decisions. Several real life examples are used and the book is heavy on applying principles within the investment realm. Get your copy of The Emotional Investor today.