Wednesday, September 29, 2010

The Alfred E. Neuman School of Investing

Emotions are one of the toughest things to control in investing.  It's hard not to be euphoric when stock prices are soaring and want to dump a lot of money into the market on the assumption that stock prices will rise to the moon.  And likewise, it is difficult not to be depressed and despondent when prices are sinking to multi-year and you have a substantial paper loss-- the natural instinct is to cash in as fast as possible and move your money to a "safe" place.  Of course, there are no "safe" places and every thing you do with your money entails risk, whether hiding it in a mattress or investing in a T-bill.

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.


  1. There's a piece in the book "The Snowball" that is about Buffett that talks about his strategy of buying below book value. He said if the stock went up he would realize a profit and if it went down he would continue to accumulate until he owned the company and be prepared to liquidate. He said people either get it right away or really never get it.
    I think it's the same with then "Alfred E. Neuman" investment approach.

  2. This is great advice, love the analogy of Alfred from Mad Magazine :) It's true that one must leave emotions to the side and make the most sound decisions about our financial plans and goals. Thanks for sharing, will have to look into Alfred E. Newman's approach.