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More investor psychology, and some humor

Richard Loth

I didn’t have room in last week’s column to comment on some books worth reading on the subject of behavioral finance. You may recall that academics and professional investors are paying increasing attention to the impact of investor psychology on the investment process. A few readers have asked me to recommend some reference works that deal specifically with this subject matter.

I am personally acquainted with just one book in this field, which I think should do the job: Gary Belsky’s and Thomas Gilovich’s “Why Smart People Make Big Money Mistakes and How to Correct Them: Lessons From the New Science of Behavioral Economics” (Simon & Schuster, 2000). The book’s lengthy title belies the fact that it is a relatively short (224 pages), easy read, and a very good introduction to behavioral finance.The authors attempt to answer a very basic question – why do so many otherwise rational individuals make irrational decisions when it comes to money? They use examples that everyone can identify with, and they provide answers in plain English. They believe “that by identifying the psychological causes behind many types of financial decisions, you can effectively change your behavior in ways that will ultimately put more money in your pocket and help you keep more of what you already have.”Financial humorI’m now going to switch topics. I’m writing this piece on the last day of the year 2005 and thinking about what there is to say, that hasn’t already been said, about the past year’s stock/bond market performance. The most descriptive one-word assessment that comes to my mind is “mediocre.” More importantly is the question of what do investors have to look forward to in 2006. I’ll provide my perspective on that answer in next week’s column, but I’ll give advance notice that I think investors are in for a rough year.To offset what appears to be a somewhat dreary outlook, I thought it would be only fair to add a little note of cheer here in the form of some investment humor, which surely qualifies as an oxymoron, but I’ll try anyway.I picked up these humorous tidbits form Dustin Woodward’s Web site, http://www.mutualfunds.about.com, which has a lot of good educational material on mutual fund investing. In addition, there’s an “Investment Humor” tab, which is the source of the following items.Unconventional advice from an investment adviser: “If you bought $1,000 worth of Nortel stock one year ago, it would now be worth about $49. With Enron, you would have $16.50 of an original investment of $1,000. With $1,000 in WorldCom, you would have less than $5 left. “If you bought $1,000 worth of Budweiser (the beer, not the stock) one year ago, drank all the beer, then turned in the cans for the 10 cent deposit (where available), you would have $214. Based on these results, my current investment advice is to drink heavily and recycle.Here’s a Martha Stewart story from Dennis Miller: “She denied allegations that she had been given inside information to sell 4,000 shares of a stock in a biotech firm about to go under. Stewart then showed her audience how to make a festive, quick-burning Yule log out of freshly-shredded financial documents.” To finish up, here are a few amusing, but true, ticker symbols: Internet America, Inc. (GEEK) provides some sort of high-tech Internet service; Cedar Fair LP (FUN), operates amusement and water parks; SuperTel Hospitality (switched from HUMP to SPPR) operates “limited-service hotels;” and VCA Antech (WOOF), operates diagnostic veterinary labs and hospitals for dogs. The Investing Wisely column is written by Richard Loth, managing principal of Mentor Investing and an independent registered investment adviser. Loth can be reached at 328-5591 or mentor@centurytel.net.


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