The Emotional Cost of Investing: This Investor Paid the Ultimate Price!
I was saddened and mortified to hear the story of Alex Kearns. For years I have been talking about the emotional cost of investing and spending lots of time in the educational part of the show to drive home this important topic. I have heard tragic stories over the years about mistakes in portfolio construction, which typically means having too much concentration in a single security that ends up digging such a hole it’s near impossible to reverse. Sadly, most investors who choose to go it alone as a Do it Yourself (DIY) investor do not spend the required time needed to learn about diversification. For too many, it’s about fast money and the quick high from gambling.
The science is very clear here. “Research by neuroscientist Hans Breiter shows the same part of the brain activated by drugs like cocaine is also triggered when a person anticipates a financial gain. That has been supercharged in the new era of online trading platforms.” You literally get high from trading wins. Unfortunately, the losses affect a different part of the brain. The “fight-and-flight” mechanism kicks in with losses releasing adrenaline. The science shows that this is no different than if someone put a gun in you face and asked for your wallet. The tragic story of Alex Kearns is not a new one, but the epidemic of using the stock market to gamble is something the regulators will and should look at. It’s a complicated issue to be sure.
A recent trend in the wake of the COVID lockdown has been an explosion of DIY traders. I hate to say, but the vast majority of them do not have a basic understanding of why they are making the choices they are. The massive buying of HTZ (Hertz Global Holdings) in the days following it’s bankruptcy announcement and the “potential” secondary offering of stock led to a community of on-line gambler junkies to pile in. It made headlines for days in the media that tends to pump and discuss the big movers of the day.
With this in mind, I will be populating my new YouTube Channel with lots of content on how to navigate markets, invest prudently, and minimize the adverse impact of emotional investing compared to the hormone charged gambling that this new generation of investors seem to embrace.
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