Wednesday, September 29, 2010
The Alfred E. Neuman School of Investing
The natural reactions to the scenarios above are the irrational reactions. A rational investor would hoard cash when prices are high and buy with both fists when prices are low. But how many people have that much control over their emotions? Not many.
An approach that most investors can stomach is something I call the Alfred E. Neuman School of Investing. Some of you may remember Alfred from Mad Magazine, a not too bright kid who is unconscious and unaware of what is going on around him. To be a successful investor you have to tune out the noise all around you that causes euphoria and panic, and stick with your investment plan; you need to train your emotions to be in the "What, me worry?" camp. The stock market never goes straight up or straight down, and it always recovers given time. And time is your friend as an investor.
The Alfred E. Neuman law of investing might be defined as: investment returns decrease as motion increases. When panic buying and selling crescendos, the average investor mistimes moves in the market and penalizes their own investment returns. Sometimes it's better to be unconscious and unaware like Alfred E. Neuman, happily dollar cost averaging in both up and down markets.