Admit it. You know a nearly 800-point decline in the Dow Jones Industrial Average (.DJI) is only a 3% drop. But it makes you feel uneasy anyway—especially when it happens twice in a row during intraday trading, as it did this week.
It may also make you want to do something. Or at least talk about it with a friend.
So let me tell you a story.
One of the most extraordinary investors I’ve ever met, William “Jack” Hurst, who died in 2014, knew how to handle turbulent markets with masterful calm. By the time I met him in 2005, Mr. Hurst had been almost entirely paralyzed by amyotrophic lateral sclerosis; he could move only a few muscles in his face.
With infinite physical and psychological patience, using a brain-computer interface he operated by selectively twitching his facial muscles, Mr. Hurst assembled and monitored a portfolio immune to the mob psychology of the internet-stock mania in 1999 and 2000. He swept in after that bubble burst, buying a few dot-com stocks at bargain prices.
Mr. Hurst bought or sold only a few times a year. Whenever he did, he consistently took the other side of the market’s emotions.
Almost entirely home-bound, Mr. Hurst socialized only with close friends and family. He shunned online stock forums. He watched financial television—on mute, so he would never be tempted to trade on short-term news.
Why was Mr. Hurst a model for us all?
Over and over again, researchers have shown that investors’ willingness to withstand losses depends largely on where they live and whom they socialize with. No investor is an island.
The latest evidence is new data out Friday from Riskalyze, a firm in Auburn, Calif., that provides software to estimate investors’ risk tolerance when they work with their financial advisers.
Riskalyze sifted through responses from more than 458,000 clients of roughly 22,000 advisers to look at state-by-state patterns. The firm scored investors’ responses on a scale from 20, at the lowest, to a maximum of 90.
Perhaps unsurprisingly, New Yorkers scored near the top, at 85. But Nebraskans topped them, ranking highest on the scale of willingness to take risk, with a score of 90. Alaskans, North Dakotans and Marylanders weren’t far behind.
At the bottom were residents of New Jersey, Florida, New Mexico, Arkansas and West Virginia, with scores of 37 and below. (Vermont ranked last, but with a sample of fewer than 200 investors the results aren’t meaningful.)
The differences across states suggest that investors tend to be more willing to take risk when their neighbors also are, and less when those who live nearby are more timid.
“I think these results illustrate how emotional contagion can be real,” says Aaron Klein, chief executive of Riskalyze, “and how much we’re affected by what our friends, families, neighbors and coworkers are thinking and feeling.”
Finance professors Zoran Ivkovich of Michigan State University and Scott Weisbenner of the University of Illinois have shown that individual investors are significantly more likely to buy stocks in a given industry if other investors who live within a 50-mile radius are also buying.
Even professional asset managers who work near each other may end up investing like each other.
Economists Harrison Hong of Columbia University, Jeffrey Kubik of Syracuse University and Jeremy Stein of Harvard University have found portfolio managers of mutual funds based in the same city tend to mimic each other.
All else equal, if the average fund manager in a given city raises its stake in a stock by one percentage point, other funds based there will add about 0.13 percentage points to their position in the same stock within a matter of months.
You could see that in Denver in the 1990s. Local mutual-fund companies Berger, Founders and Janus (JHG) (now part of Janus Henderson Group PLC) tended to buy so many of the same hot companies at such high prices that I once heard a market wag call their holdings “those Mile-High stocks.”
Investors probably behave like their neighbors because gossip, news and beliefs spread by word of mouth.
In a survey published in 1989, economists Robert Shiller of Yale University and John Pound of Harvard University found that one in three individual investors said they recently bought a stock because a friend or someone else other than a financial professional talked with them about it. A tenth of portfolio managers said the same thing.
When the stock they bought had especially high returns, 50% of individual and 30% of professional investors admitted buying partly because a friend or other non-professional had discussed it with them.
No wonder the great investment analyst Benjamin Graham, mentor to Warren Buffett and author of the classic book “The Intelligent Investor,” cultivated a quality that the ancient Stoic philosophers called “ataraxia,” or imperturbability.
Graham reacted to events and people with a “certain aloofness” and an “unruffled serenity,” he recalled in his memoir, inspiring even members of his own family to describe him as “humane, but not human.”
With markets gyrating, unruffled serenity may become important again. If volatility scares you, spend more time with family and friends who don’t obsess over stocks. You’ll be happier now—and, probably, richer later on.
|For more news you can use to help guide your financial life, visit our Insights page.|