Uncategorized, Weekly Update

Investing is an exercise in controlling our emotions

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Published June 22, 2018


Here at TimingCube we are dedicated to using models to drive our investing decisions.  We recognize that investing our hard-earned money is really an exercise in regulating our emotions.  We are constantly faced with a constant flow of noise and information, much of which can cause us to make poor money decisions.  Our models don’t hear that noise.

They only see the price, volume, and related information the market dispenses each day – the hard numbers and facts of the day.  We rely on these models because we KNOW that we are emotionally wired to be terrible investors – prone to fear and greed at the worst possible times (for our investments at least).  Our unemotional models prevent the sort of PTSD described in this blog post from Nick Maggiulli’s blog.  Our entire investment philosophy is built around AVOIDING the damaging effects of bear markets, for they damage more than just our investment accounts.  Here is Nick’s post:

Vernon Lamberg had been dead for 8 to 10 hours by the time they found his body in a hotel room in Wautoma, Wisconsin, two hours northwest of Milwaukee.  Five days earlier he had started his Monday like any other.  However, on that Monday, Lamberg would suffer a trauma so devastating that it would eventually lead him to take his own life—it was October 19, 1987.

For those of you that aren’t familiar, October 19, 1987 (“Black Monday”) was the greatest single day decline in stock market history with the Dow Jones Industrial Average dropping 22.6%.  Over $500 billion in wealth was wiped out on that day as the Dow closed at 1,738, a level not seen since April 7, 1986, roughly 18 months prior.  Visually, the single day drop is almost unbelievable:

Dow Jones 1987

Vernon Lamberg had personally lost over half a million dollars and became a broken man as a result of the crash.  However, it wasn’t the monetary losses that broke him, it was something deeper than that.  A few days after Lamberg’s death his son stated in an interview : (Investor who lost in stock market crash commits suicide):

He didn’t take his life because of the money…it was a personal shame that he couldn’t handle.

Lamberg wasn’t the only one to take his life because of Black Monday either.  Arthur Kane, 53, was a longtime visitor to the Merrill Lynch offices in Miami when a week after the crash he went into the branch and opened fire, killing one and wounding another Merrill employee before taking his own life.

With these tragic events, a question lingers: what causes financial post-traumatic stress disorder (PTSD)?

The answer to this lies in an incredible book I read recently called The Evil Hours: A Biography of Post-Traumatic Stress Disorder by David J. Morris. Morris writes:

In short, the more helpless the patient felt, the more likely he was to be traumatized, a finding that essentially remains unchanged to this day.

While both Lamberg and Kane felt helpless as a result of the crash, this doesn’t fully explain why they reacted so strongly.  In fact, if you watch these traders discuss their reaction to Black Monday you will see that they also felt helpless at the end of that historic Monday.  So, what really separates a normal event from a traumatic one for most people?  Morris explains:

“The experience of trauma is context-dependent,” meaning its essence lies in the subjective experience of the victim; in other words their story as they tell it to themselves.

These two ingredients: helplessness and the story we tell ourselves about an event are the two most important factors when determining whether someone experiences trauma.  In Lamberg’s case, it is clear that he had convinced himself that he was a failure after the crash, while Kane had become convinced that the brokers at Merrill were to blame.  Their trauma existed in the story, or the memory, that they told themselves about the crash.  As Morris states:

Normal, nontraumatic memories are owned and integrated into the ongoing story of the self.  These are, in a sense, like domesticated animals, amenable to control, traceable.  In contrast, the traumatic memory stands apart, like a feral dog, snarling, wild, and unpredictable.  This is in part what the psychoanalyst I interviewed meant when he said that, “trauma destroys the fabric of time.”

This is why the term “the evil hours” is so relevant for financial markets, because we replay traumatic market moments in our head over and over again and they can come to define how we invest in the future.  For example, one study conducted after 2008 found that 93% of financial advisors experienced symptoms consist with PTSD with many becoming increasingly skeptical of buy and hold investing.

However, there is another interpretation of “the evil hours” as not just the hours we replay in our minds after we live through financial trauma, but also the hours during which markets actually decline.

We can get a clear picture of this if we put volatility on the x-axis and the daily return on the y-axis:

S&P 500 Daily Return and 30-Day Volatility

The far right side of this plot is where “the evil hours” reside.  They wreak havoc on us psychologically while they are happening and then, if we become traumatized, we relive them again and again as they scare us away from markets.  You might think I am exaggerating, but consider how many people you have heard about that never got back into the markets after 2008.  They are traumatized and still waiting until it is “safe” again.

Back here at TimingCube with a simple reminder that, with our models, you never have to worry about the types of financial trauma described above.  We have protected our subscribers through every bear market since we opened our virtual doors 17 years ago.  With each passing day we get closer to the next bear market.  Tell your friends and family that they may want to consider an investment approach that protects their wealth, first and foremost.  We don’t have to experience the stock market’s inevitable next round of financial PTSD.

Market Update

The market week was propelled largely by the back and forth on trade tariffs this week. The Monday trading session produced mixed results with large industrial corporations under pressure from the trade tariff concerns, while more domestically-focused small company shares continued to be largely immune from those concerns. The broad S&P 500 dipped -0.2% Monday while small-cap shares were higher by +0.5%. An escalation of the trade skirmish Monday night sent stocks lower Tuesday. The Dow Industrials were down over -1% on the day while the Nasdaq slipped only -0.3%. Stocks held firm Wednesday with the longest-serving Dow Industrials component, General Electric (GE), being replaced in that market index by Walgreens Boots Alliance (WBA). Tech/consumer stocks continued their notable outperformance, with the Nasdaq climbing by +0.7%. That gain was more than returned Thursday on a Supreme Court ruling that states can require online retailers to collect sales tax. The move is seen giving a boost to physical “brick and mortar” stores while upping the cost of business for online merchants. Additionally, energy shares slumped as a global meeting of industry leaders gathered amid calls from OPEC for higher production levels; a move which would potentially lower oil prices and diminish energy profits. That decline was quickly reversed in Friday’s trade, however, as the agreed production increase came in substantially below expectations. Oil prices leapt almost +5%, driving oil company shares higher. The S&P recovered only +0.2% though while the Nasdaq dipped -0.3%

Stocks this week gave back a fraction of their recent move higher. The S&P 500 moved down -0.86% while the Nasdaq 100 (QQQ) was off -0.73%. Small-cap stocks closed the week unchanged.

Warm wishes and until next week.

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