Update No. 224 – 17/07/15

I have talked often in these pages of the psychological elements of investing.

Our base human instincts, which evolutionarily have served us extremely well to this point, let us down badly when it comes to having our capital at work in volatile markets.

Our ancestors, when faced with what appeared to be substantial trouble or uncertainty were usually best served to turn and run. In fact, those that didn’t panic were among the first removed from the gene pool by whatever the risk was, thus ensuring the genetic predisposition to flee perceived danger was passed along. More to the point, the genetic instinct to face the danger was often eliminated.

Investors facing apparent uncertainty or trouble are seldom well served by fleeing markets. They seem to frequently zig when they should zag, only to zag when they should have zigged. When we buy a stock and it declines in price, we’re prone to thinking “Someone knows something that I don’t”. This is rarely the case. Markets swing wildly based on little more than sentiment.

I consider a relative mastery of my emotions to be my greatest strength as an investor. That is not to say I have complete control over my baser instincts, but that I feel my level of control is several standard deviations better than average.

I have met many people who were more intelligent than myself, but faced with a crisis, I am not sure I know many more capable of dispassionately plotting the most prudent course of action.

I struck upon this as the topic for this week’s blog when thinking about an incident a couple of months ago when my own wretched humanity got the better of me.

After turning off an 80kmh road onto a slip road, I observed a bicyclist wobbling unsteadily along the shoulder of the road. Without warning, and without looking, the cyclist crossed from the left side of the road to the right. With perfect control, the correct action would have been to brake as hard as possible in a straight line before striking the cyclist, teaching him a valuable lesson about thinking about the potential consequences of his actions before taking them.

What instead happened was my own sense of humanity kicked in and I tried very hard not to cause harm to an idiot who desperately deserved to have substantial harm come to him. Instead, I braked hard and steered my car into a gutter with a guard-rail. I managed to scrape an alloy rim that had travelled over 100,000 kilometres without ever experiencing the feel of the concrete’s harsh surface. A small scratch in the bumper also resulted. The half-witted cyclist wobbled away, either completely oblivious to the devastation he had left in his wake, or simply unconcerned. The harm in this situation was passed from the person who should have suffered it to an innocent party.

The fortunate thing with markets is that decisions don’t have to be made in a split-second. You can spend time thinking them over and with sufficient time and effort put into the observable facts; a good decision based on observing the relevant probabilities can be arrived at. If your decision framework is good enough, the only elements contributing to the decision will be the relevant data. Human emotion can be virtually eliminated.

I am thankful that this is the case as the example shown above indicates even in someone like myself with good control over my baser instincts, if rushed, the incorrect decision is sometimes arrived at – Tony Hansen 17/07/2015

P.S I jape of course. I am a hard man, but I don’t wish actual physical harm on someone, even if they desperately deserve it. It IS my general preference is for fools to suffer the consequences of their actions. It is nonetheless upsetting to be the one who suffers from someone else’s foolish actions. I imagine young Greek citizens feel similarly about their elder citizens who have enjoyed the fruits of profligacy and tax avoidance over the last 30 or so years that have led to their present predicament…

EGP Fund No. 1 Pty Ltd. Up by 1.27%, trailing the benchmark by % since July 1^st 2015. Since inception, EGP Fund No. 1 Pty Ltd is Up by 88.03%, leading the benchmark by 44.14% all-time (April 1^st 2011).

^{*1 after a 31 May 2013 dividend of 2.333 cents per share (cps) plus 1.000 cps Franking Credit, a 31 May 2014 Dividend of 7.000 cps plus 3.000 cps Franking Credit and a 31 May 2015 Dividend of 8.6667 cps plus 3.7143 cps Franking Credit}

^{*2 calculated based on dividends reinvested}