Psychology - the least appreciated aspect of investing
Excerpt from Good Returns by George Schwartz
It is an unfortunate truth — but a truth, nonetheless — that most investors don’t make very much money in the stock market. The reason is simple, they buy high and sell low. Of course, they know they should be doing just the opposite. They understand that the idea is to buy a stock more cheaply than the price to which it can ultimately rise. Indeed, they would admit that it’s foolish to do anything else.
When I talk about Warren Buffett’s contrarian practices or the principles of Value Investing, people have no trouble recognizing the simple truth in what I’m saying. Buffett’s approach is so obvious: Buy when everybody else is selling and driving the price down. Likewise, Value Investing is no big mystery: Do your homework, and go with a company that has good management, strong numbers, and sound business characteristics. What could be more sensible?
Yet, most investors continue to do precisely the wrong thing. Why? Because they are human beings whose actions are driven by the psychology intrinsic to the human condition. Psychology may be the least appreciated aspect of investing. More often than not, people’s investment behavior has less to do with the prospects of companies than with what those people assume, believe and feel about their own prospects. Their decision making reflects not so much reasoned choice as it does their confidence or anxiety, optimism or pessimism, the emotions and conflicts they’re experiencing at a particular moment. So in large measure, the study of investing is about the study of investors.
Jason Zweig, a financial columnist for The Wall Street Journal, has delved deeply into the behavior and decision-making patterns of investors. In his book, Your Money & Your Brain,1 he surveys research being conducted in an emerging field called neuroeconomics which seeks to discover how the human brain functions when confronted with choices about money. Zweig calls neuroeconomics a “science,” though it’s probably still a bit too new to bear that exalted title without challenge. At this point, the term “research specialty” would probably be most accurately descriptive. In any event, work under way in this field shows considerable promise in applying the techniques of neurobiological analysis to discerning why investors do the things they do.
About the book: In Good Returns: Making Money by Morally Responsible Investing, author and Chartered Investment Counselor George P. Schwartz, CFA, calls conservatives and Christians to pursue a portfolio that reflects their values. Schwartz explains the important distinction between the pop culture notion of socially responsible investing and the narrower and more exacting demands of morally responsible investing. While socially responsible investments tend to screen out companies according to left-leaning causes like environmentalism, gay rights, and a broad range of social justice issues, morally responsible investments screen out companies according to a clear set of criteria: those who support or service the abortion industry, producers and distributors of pornography, and companies involved in embryonic stem cell research.
Good Returns offers time-tested wisdom on the complexities of the investment process, demonstrating why moral people make good investors and morally upright companies can be profitable investments. Schwartz also offers insightful commentary on the current political policies affecting the country’s financial condition. He points out that even in an unfriendly political climate, morally responsible investing is a way that people can make a real and positive impact.
About the author: George P. Schwartz is a Chartered Financial Analyst and a Chartered Investment Counselor. For forty-three years he has been an investment counselor, analyst, and portfolio manager. He is president, CEO and CIO (Chief Investment Officer) of Schwartz Investment Counsel, Inc., a registered investment adviser headquartered in Bloomfield Hills, Michigan, which he founded in 1980. His organization manages stock and bond portfolios for endowment funds, foundations, pension funds, and mutual funds including the Schwartz Value Fund and the Ave Maria Mutual Funds, America’s largest family of Catholic mutual funds.
Good Returns: Making Money by Morally Responsible Investing by George P. Schwartz, CFA
Geodi Publishing/May 2010/ISBN: 978-0-9844042-0-9/191 pages/hardcover/$25.00