ARBOR OUTLOOK: Mistakes created by emotion-driven investing
“Walking in the sunshine, sing a little sunshine song;
Put a smile upon your face as if there;s nothing wrong ...
Think about a good time had a long time ago;
Think about forgetting about your worries and your woes...
— “Walking in the Sunshine,” as performed by Roger Miller
In an interview conducted a few years ago with Stan Druckenmiller, Home Depot co-founder Ken Langone asked the famous hedge fund investor what his biggest mistake had been. Druckenmiller didn’t need much time to ponder his answer.
In February of 1999, in the middle of the tech boom, when dotcom stocks only seemed to go up, Druckenmiller made the decision to use $200 million to short internet stocks. Druckenmiller rightfully sensed that the tech boom was a bubble and wanted to bet on it popping.
But a little over a month later tech stocks were still climbing precipitously. Druckenmiller found himself down by $600 million, decided that he had been wrong and reversed field, buying tech stocks instead of shorting them.
At year’s end, his fund was up 35%, and in January he sold all his tech stocks. Had he stopped there he would have been fine. But dotcom stocks kept climbing. In March of 2000, Druckenmiller, against his better judgment, bought $6 billion worth of tech stocks. Within weeks the bubble burst and his fund lost $3 billion on that bet.
When Langone asked him what he learned from his mistake, he replied, “I didn’t learn anything. I already knew that I wasn’t supposed to do that. I was just an emotional basket case and I couldn’t help myself.”
The irony is that Druckenmiller knew he was making a mistake when he pulled the trigger buying into a bubble, but he just couldn’t stop himself. Call it FOMO…Fear of Missing Out. Even the smartest investor can lose money by failing to heed their better judgment and letting emotion rule their investment decisions.
Piling into a hot sector or stock with all of your chips is a well-known temptation, even for seasoned investors with years of experience. I often find myself saying that managing money during bubbles appears easy but is actually more difficult than managing money during busts.
It’s easy to lose your investment discipline when prices only seem to go up. Bear markets automatically impose discipline.
Both of my sons work for my firm. While neither managed money during the dotcom bubble, I have attempted to institutionalize the memory of what it feels like to participate in markets during a bubble. It must have sunk in. My younger son, who writes a weekly blog called Beach Reading (available on our website), recently referenced dotcom bubble valuations and how many of today’s tech darlings are as aspirationally priced as their dotcom equivalents were.
Allowing emotion to run wild is usually not a good formula for success. Most folks need to be careful investing their nest egg; the markets are not a roulette wheel or dice game. Success requires careful and calm decision making.
Margaret R. McDowell, ChFC®, AIF®, author of the syndicated economic column “Arbor Outlook,” is the founder of Arbor Wealth Management, LLC, (850.608.6121 –www.arborwealth.net), a fiduciary, “fee-only” registered investment advisory firm located near Destin, FL. This column should not be considered personalized investment advice and provides no assurance that any specific strategy or investment will be suitable or profitable for an investor.