Stocks for the Long Run, Part 4 - Investment Behavior

This is my final post in my series discussing “Stocks for the Long Run” by Jeremy Siegel. The book uses historical data going back to 1802 to make a case for owning stocks, despite their risks.

Part 4 – Bad behavior often keeps investors from achieving good results

Despite all that we have discussed over the past three weeks, many people might ask why their own investing experience seems so different from what history presents. I would suggest that you ask yourself two questions -

• What timeframe am I considering to be my “investing experience?”

If you started investing in the last 10 years, I bet you have different beliefs than an investor who started in the 1970’s. Use history as a guide for decisions moving forward. While there have been periods with below (and above) average returns, over time the stock market has a tendency to revert back toward healthy long-term average returns.

• What investment biases do I have?

You have to be really honest with yourself here. While the long-term historical returns of stocks make them attractive, the reality is that there are gut wrenching periods to go through if you are a stock holder.

“…you can argue that if you’re not willing to react with equanimity to a market price decline of 50% two of three times a century, you’re not fit to be a common shareholder, and you deserve the mediocre results you’re going to get…” – Charlie Munger

In fact, how you feel may often be an indication of how not to invest. Siegel discusses how we are wired to be more upset about losing a given amount of money than we are about gaining the same amount, especially when it is tied to a reference point. Let’s say you retire with $1,000,000. If you retire and have several positive years, you likely can stomach the next downturn because haven’t gone below $1,000,000. However, if you retire and have several bad years you are more likely to exhibit bad investment behavior because you are focused on how to get back to $1,000,000 as quickly as possible.

If you have a reference value for your investments as I just discussed above, throw it out and start over. Eventually, that reference point is likely going to be tested and anchoring yourself to it can set you up for some terrible mistakes!

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