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Based on historical data, it’s no secret that there are very few investments that can keep up with the returns yielded by an asset class like shares.
But investing can be a lot like taking a dream holiday at your favourite holiday destination ... ridden with flu.
I don’t think I have to go into too much detail as to why body aches, a pounding headache, high fever and all the other horrible flu symptoms would suddenly make that dream holiday sound pretty miserable.
Why? Because your illness is wreaking havoc on your emotional state.
As I was writing this article, my one eye caught my other computer screen showing in large red writing that the FTSE/JSE All Share Index at current levels (30 May 2018), has already lost 7% of its capital value for 2018.
You definitely don’t need a specialist to explain to you why this index’s solid long-term returns record is gnawing at your emotions over the short term in ways that no type of flu can.
I don’t think that nearly enough economists and analysts consider the impact of emotions on investments, which is, in my opinion, one of the most important aspects of investments.
It doesn’t matter how attractive or cheap a particular investment may appear to be, if you have the proverbial “flu”, it’s more than likely going to seem like a horrible idea.
If your investment choices aren’t based on proper homework, analysis or probability, its normally based on either greed or fear, both of which can land you in very hot water.
A clear example of this can be seen right now in the FTSE/JSE All Share Index. In 2017 the Index grew by more than 20%, mostly owing its success to a share called Naspers*, and now it’s trading just barely positive on a rolling 12-month period.
This volatility is a clear indication that emotions are running high and having a huge effect on market movements.
The effect of emotional investing can be seen quite clearly on one of my favourite local rand-hedging shares, Mondi.
The company released good year-on-year financial results and the share managed to grow by more than 250% over the 5-year period between 31 December 2012 and 31 December 2017.
In October 2017, however, a firmer rand, strengthening from R13.80/$ to levels around R11.70/$ in February this year, left Mondi shareholders “feverish” as they had to watch the share price losing nearly a quarter (24%) of its value over this period.
Luckily, emotions gave way to good, solid, factual news that pushed the share price back to just over R344, not only trading 18% higher than levels in February, but also more than 6% positive for 2018.
I’m sure that no investor thought that this was a fun ride, and that most of those who purchased Mondi shares around October 2017 experienced at least one or more of the following emotions:
- Denial: “Why did I buy Mondi shares?”
- Resentment: “How could I have been so stupid?”
- Shock: You go to sleep after Mondi’s share price has dropped by 10% within a month, hoping that it would all have been just a nightmare when you wake up the next morning.
- Obsession: You obsess about the capital that you used to own.
- Gamble: As the Mondi share price traded 10% lower a month later (November 2017), you finally decide to borrow some money to trade yourself out of this loss, only for the share price to drop by a further 14%.
- Fear: With prices close to R290, and nearly a quarter of your capital gone, you decide that enough is enough and sell everything.
- Regret: At current levels, you would have been very disappointed in yourself if you had sold it all, thinking, “if only I had waited a little while longer.”
This is exactly where most investors (including professional investors) seem to get stuck, since investments, especially those in shares, should be viewed from a long-term perspective. One thing, however, has remained certain over all these years: emotions and investments do not go hand in hand.
*finweek is a publication of Media24, a subsidiary of Naspers.
