Weigh the Facts in Investing Tendencies

September 16, 2008
Bill Staton, MBA, CFA

Physician's Money Digest, May 31 2003, Volume 10, Issue 10

With stock prices dramatically downover the past several years, investorstend to be more scared to ownthem today than they did in the past. Inother words, the lower the stock pricesgo, the more they frighten a lot of investors.But this shouldn't be the case; infact, it's pretty counterintuitive whenyou think about it.

AMERICAN MISPERCEPTION

Why is it that Americans like to buyeverything on sale except the shares ofquality companies? Consumers in thiscountry jump at the sound of any deal,whether it's a 0% financing deal on a newcar or a Memorial Day mall-wide sale. Weclip coupons and drive 10 minutes out ofthe way to save 5 cents a gallon at thecheap gas station. Yet, we tend to flock tostocks that are trading higher and runfrom those at their bargain lows.

I think it has to do with our perception,or let me say misperception, of risk vs reality.For example, plenty of people don'twant to enter the ocean because they fearbeing attacked by a shark. The odds ofbeing killed by a shark are 1 in 2.81 million,so only a handful of people aroundthe world are actually bitten each year.And most of them survive with minorwounds. But in New York City, 1500humans bite 1500 other humans annually.People who visit New York don't worry asmidgen about being bitten by another oftheir own species, but a lot of these samepeople deathly fear a shark attack.Where's the greater risk?

Likewise, the odds of your dying fromthe flu are 1 in 130,000, while the odds ofdying from lightning are 1 in 3 million.Most of us think we won't die by the handof a gun where the odds are 1 in 28,000,but we do fear death by a snake, lizard, orspider, where the odds are only 1 in 56million. And what about radiation fromcell phones? The most recent statistic saysthe odds of your dying from using yourcell phone too much are 0. In other words,it's not happening, whether you fretabout it or not.

EMOTIONS OVER FACTS

When it comes to personal perceptionof risks of any kind, evidence shows thatour emotions generally outweigh thefacts. And that, my friends, explains whyso many people do so poorly with theirmoney. Facts aren't good enough for theaverage investor. Greed and fear, on theother hand, tend to be.

Stocks go down; investors sell. Bondsgo up; they buy. Real estate goes up;they buy. Yes, it seems that simple, yetwhen you look at 1995 to early 2000,stocks went up and investors bought alot of hot speculative issues—exactly thewrong thing to do—because it was soeasy to pay too much. And that's what'shappening today with bonds and residentialreal estate. The more they go up,the more people are willing to pay. Andthe more stocks stay flat or go down, themore people stay away.

There are a lot of cheap stocks outthere. You may be afraid to buy themnow, but a few years down the road,you'll be glad that you did.

Bill Staton is chairman ofStaton Financial AdvisorsLLC, a money managementfirm whose accounts were up in2001 and again in 2002. Joinhis free weekly "Dollar-BillClub" and get a no-obligation trial to Bill'sweekly "E-Money Digest" by e-mailing himat bill@billstaton.com. He welcomes questionsor comments at 704-365-2122 or 704-365-1910 (fax), or visit www.billstaton.com.