money managers are emotionally and intellectually dumb when it
comes to stock market investing. If they were smarter, they would at minimum
buy and hold the market index.
Emotional and intellectual intelligence has nothing to do with this inability
of investors in stocks to keep pace with the market. After all, marketing
studies show most investors are of average or better intellectual intelligence.
Statistically, it is unlikely that 80 percent of any large group is below
average in any area. What is more likely is that a large percentage of the
underperformers, both professional and amateur, are emotionally and intellectually
healthy but do not have the emotional makeup to be investing in
stocks. Investor’s who would thrive with tax lien certificates or real estate
investment trusts (REITs) have been diverted into the stock market by the
mass publicity machine of Wall Street. After all, every study I have seen
shows that 10 percent or more of people have the emotional and intellectual
makeup to thrive in the stock market. It is the failure of these studies to set
out better alternatives for the rest of investors that this book remedies.
Emotional compatibility is not a statistic within a range that incorporates
the entire population such as an intelligence quota (IQ). It is a matching
process. In relationships, each unique individual is matched with another
unique individual. There are many types out there. If you find yourself always
with the wrong type, get help.
The same is true for investment compatibility. There are hundreds of
asset classes. Step 1 discusses the emotional implications of all the major
and many minor investment classes. Fortunately, if you find yourself incompatible
with the stock market, the chances of finding better investment satisfaction
elsewhere are high. In the case of Michael and Susan, once they
work on their investment maturity, they will find many asset classes that suit
them better than stocks.
Michael tinkers with his portfolio obsessively. In prior years, he read
investment magazines and newspapers late into the night. Now he has a
fast Internet connection and often signs off after midnight. Susan is freaked
out by the paper gains and losses that routinely occur every month. The
abstract nature of the account statements, reports, newspaper articles, and
Web sites makes her nervous. Her mind cannot grasp what they really own
nor does she understand why Michael is constantly playing with it. Ever
since the decline of 1990, when they were new to the stock market, there
has been a sense of impending doom over their financial security.
Interestingly, Michael and Susan would both be happier with a portfolio
primarily consisting of single-family homes. Michael’s tinkering could cut
costs and improve rents and tenant quality. He has no guilt about being a
landlord. He and Susan have a nice house they are proud to own. They are
now living in their third home together. Together they were able to buy two
cute cottages in attractive neighborhoods, which they sold for much more
than the purchase price. Michael is fair with the many employees he supervises.
There is no reason he would be a poor landlord. Michael is also not
likely to trade properties. While he is able to justify many small commissions
to a discount broker, having never added them all up, the idea of giving 6
percent of his property to a Realtor every time he sells a building does not
appeal to him. Susan could drive by and look at their properties any time she
needed reassurance. The children could help out cleaning and fixing up
between tenants. Though Michael may lose a major topic of conversation
at the office, he would sleep better and be more productive at work. He
would also be wealthier. If, in each of the last 10 years, he had bought a
new single family home with $50,000 down, putting nothing in his 401(k) or
anywhere else, he could potentially have equity of $1,000,000 today.
Ten years ago Michael looked at both real estate and stocks. A stockbroker
told him that real estate was too complex. Because stocks and stock
mutual funds were simple and easy to understand, he would do better in the
stock market. Ironically, in 10 years of study, Michael still does not grasp all
the complexities of the stock market; yet with no study, he and Susan were
able to purchase three homes. The value of his current home has far outperformed
his stock investments.
Despite his own experience, Michael still believes that real estate is too
complex and the stock market is relatively simple. In fact, more than 100
factors can influence the price of a stock, whereas less than six factors affect
the price of real estate. At first, real estate investing appears complex. After
a year or two, it becomes simple. Stocks and stock mutual funds, a first
glance, seem simple. After a year or two, the complexities appear. After a
decade, the complexities of stock and stock mutual fund investing can become
overwhelming. Late-night online investors, including Michael, come
to understand why veteran stock managers work 80-hour weeks.
So how do Michael and Susan move out from under their defended
position in the stock market and into their comfort zone of real estate?
Financially, this can easily be accomplished. In fact, they have so few gains
in their taxable portfolio, they will not pay any taxes to shift into real estate.
They will get tax deductions from selling out. Considering the negative investment
returns they have been getting in the stock market, it also would
be reasonable to take a 10 percent penalty and liquidate their 401(k). But
emotionally, Michael and Susan are attached to their dysfunctional relationship
with the stock market.
Read More : Intelligence does not determine investment results
