Not having kids in the house any more leaves me with entirely too much time to hang out with our pets. Unless the grandkids are around, watching them interact is the highlight of my entertainment (yes, I need to get out more). I’ve noticed a parallel between their behaviors and the way people invest. Perhaps you’ll see yourself in one of these caricatures, to some extent.
There are two emotions that drive the extremes in investing behavior- fear and greed. Come to think of it, they drive behavior in a lot of other ways too. In between lies a peaceful balance, a zen so to speak (as defined by the Urban Dictionary: n: a state of coolness only attained through a totally laid-back type of attitude). Let’s imagine each of these traits through our three pets.
If you look up fear in the dictionary, here’s what you’ll see:
My poor, misunderstood cat, Pilot. Despite his legendary scary black cat appearance, Pilot is afraid of just about everything. He’s so scared of our dog that he spends 90% of his time on top of our kitchen cabinets. Pilot watches each night as we take Dutch for his walk, and Samson the cat tags along (he walks up and down the street with us). He stands in the doorway, and you can tell he really wants to come too, but he just can’t bring himself to walk through that door. On a rare occasion he will venture outside with us, but won’t follow us down the driveway, and instead stands there and cries for us the whole time until we get back. Poor Pilot misses out on so much because he’s too afraid. If you get too close to him while he’s in a state of panic, he’ll lash out at you with his claws like a snake. Investors like Pilot tend to keep too much in cash, valuing safety and security over the prospect of growth. Or they’ll react to events out of panic, making the wrong move at the wrong time.
Dutch on the other hand, well, if you’ve read his other stories here then you know he’s a greedy little thing. And like Pilot being handcuffed by fear, Dutch is handcuffed to his possessions, never free to enjoy them for what they are because he’s worried about keeping them for himself or looking to get more. Got a new bone? Great, now he has to run all over the house to find the best hiding place so we can’t find it. When he’s chewing on a bone and then needs to go out, he brings the bone with him lest those rotten cats steal it, and since he can’t sniff a hundred spots before doing his business with a bone in his mouth, he ends up dropping it and losing it somewhere. If one treat is good for Dutch, begging for more is even better. Then he just annoys us and gets nothing. Investors like Dutch want to keep winning and putting a bigger and bigger piece of their portfolio in the market, even when it becomes hazardous to their financial health. Pursuing outsize returns tends to impair judgement, and that’s when either inappropriately risky or just plain foolish investments are made.
Then there’s Samson. My big ragdoll-like Maine Coon cat. He’s the most relaxed cat I’ve ever met. He’ll melt over my shoulder when he wants to be held but doesn’t hesitate to jump off when he’s had enough. He’s friends with both fear (Pilot) and greed (Dutch) and can hang out with either when the situation calls for it. He loves to wrestle with Pilot, figuratively working out his fear, and he also likes to pal around with Dutch, pursuing his ambitions you might say (for the record Dutch thinks he’s annoying). Samson knows when it’s a good time for a nap, and when it’s time to push his way to the food bowl. Investors like Samson know that finding a balance between safety and growth is the key to a successful portfolio, and being flexible enough to roll with the punches brings peace.
I think there’s a bit of each of them driving all of us in some way, and hopefully none of us is as extreme as these guys. We just need to be careful to keep our Pilot and Dutch sides in check, and try to stay balanced like Samson.