The Psychology of Money Chapter 16: You & Me

As I write this, the Brewers just started their series against the Dodgers, and the Packers just celebrated their win over the Commanders. As Wisconsinites, we enjoy our sports teams. But could you imagine if the Packers had to put on hats and gloves and play the Dodgers? Or if the Brewers had to throw pads on and line up against the Commanders? Likely this would not be pretty. Even worse, imagine if each team played by the rules of their own game? Half the players on the field wearing pads and helmets trying to score touchdowns, and half the players wearing gloves trying to strike out their opponents. Utter chaos. It would only take a matter of seconds before everybody on the field (and in the stands) realized that these two teams are not playing the same game.

Unfortunately, in financial markets, there are different games being played with different rules, and it’s not so obvious for all the players (a.k.a. investors). Housel asks and answers, for example, How much should you pay for Google stock today? The answer depends on who “you” are. Are you in your 20s looking to start a retirement fund? Are you 80 looking to generate more income? Are you a day trader looking to sell your shares by the end of the day? Who you are and what you want will help determine if the current market price is good or bad.

Though very broad, you can think of financial markets as being played by individual and professional investors. Are you buying and selling for your own direct financial benefit, usually with a long term time horizon of years or decades, or are you doing it for your job to create liquidity in the financial markets and make your profit in the next month, week, or even day? Imagine if Google’s (Alphabet’s) stock with the perfect analysis was deemed to be “worth” $200. If it’s actually trading at $400, twice that limit, most would have reason to be repelled. How often do you knowingly and willingly pay twice what something is worth? But, if you’re a day-trader, and all you need is for the stock to go up to $401 before selling your lot of shares to make your money, you don’t particularly care what the stock is “worth.” If the next professional investor buys at $401, hoping it goes to $402, and the next starts at $402, and on and on, a bubble has been created—where that stock is trading far above what it’s “worth”. There are two potential problems with this:

1. Part of the analysis to determine what a stock is “worth” often includes how much the stock has increased in price in the recent past. In this way, the growth and positive returns feed off themselves and carry on higher and higher—until they don’t. In other words, it’s not always clear (even to the professionals) what a stock is worth.

2. Second and more importantly for you, Housel argues investors often innocently take cues from other investors who are playing a different game than they are. [...] Bubbles do their damage when long-term investors (you and I) playing one game start taking their cues from those short-term traders playing another.

Success in our personal finances comes down to how we behave. It may sound crazy, but with all the financial success and wisdom he has, Housel does not pay attention to what the market did this year, or whether we’ll have a recession next year, because that only matters for a game he’s not playing. So how should we behave?

1. Looking at your portfolio more than once per year (for example, when we’re in a review meeting) is likely doing you more harm than good. If you’re checking daily, try weekly, then monthly, then quarterly, then annually. Think: when was the last time you made a wise, actionable decision based on seeing your portfolio go up or down in a given day or week? We respond to trends that manifest over years and decades, not days, so looking more frequently than that simply causes unnecessary emotional ups and downs and worse, can lead to making a foolish decision in the moment.

2. Housel: Few things matter more with money than understanding your own time horizon and not being persuaded by the actions and behaviors of people playing different games than you are. The main thing I can recommend is going out of your way to identify what game you’re playing.

   1. In brass tacks: don’t assume that a stock, a fund, or a fund manager who happened to outperform your portfolio in a given year means anything other than a bunch of professionals not caring about what a stock is worth to you — a long-term individual investor.

   2. As Tim Brockmann often says, “Be fearful when others are greedy, and greedy when others are fearful.”

Let us know

• How often do you check your portfolio balance? Is it more or less often than you look up your car’s value on Kelley Blue Book, or your home on Zillow that you plan to never sell?

Until next time, happy reading!