Floats Like A Butterfly, Stings Like A Bee

New Year’s Eve – 2018.

While Americans were ringing in 2019 with Ryan Seacrest, a low profile event (at least for the US media outlets) was taking place in Saitama, Japan.

Floyd Mayweather, undefeated as a fighter (50-0), came out of retirement for another fight – this time his opponent was Japanese kickboxing star, Tenshin Nasukawa, a 20-year-old who has claimed several world kickboxing championships and, like Mayweather, owns an undefeated record.

Given the opportunity, we’d all like a shot at beating Floyd Mayweather. A victory would not only add another checkmark to the win column but would bring instant fame and pride for defeating the champion. The same can be said for people who would like a shot at beating the market by picking stocks or continuously making adjustments to their portfolios.

Meir Statman, professor of finance at Santa Clara University and author of Finance for Normal People and What Investors Really Want, wrote a piece in the WSJ a few years ago titled “How Your Emotions Get in the Way of Smart Investing.”

In the article he explains that people don’t invest just to make a lot of money, they invest for what the wealth will allow them to do, what it will say about them to others and how it makes them feel. We invest for utilitarian, expressive, and emotional benefits.

Statman writes that “there is nothing necessarily wrong with making decisions for expressive and emotional reasons.” But the key is to be aware that you are doing it for those reasons, as they come with a heavy price tag in the form of lower returns.

The evidence is clear that the returns of people who trade more frequently lag the returns of those who trade little or not at all. So why do people keep doing it? Why are investors constantly adjusting their strategy or seeking advice from the newspaper, TV, their brother or their advisor on what they should do next?

Statman explains:

In one survey, Dutch investors showed that they cared about the expressive and emotional benefits of investing more than its utilitarian benefits. They tended to agree with the statement “I invest because I like to analyze problems, look for new constructions, and learn” and the statement “I invest because it is a nice free-time activity” more than they did with “I invest because I want to safeguard my retirement.”

Investors trade frequently because it is enjoyable and fun, even when it’s illogical. They reject the utilitarian benefit of long-term investing for the expressive and emotional benefits.

It’s fine for Tenshin to fight Mayweather for the expressive and emotional reasons of gaining notoriety or a boost to the ego, just as it is fine for you to trade for the enjoyment of feeling like you have some control over the future or for the fun of it- but know it comes with a price. Most likely the person on the other side of your trade is a professional with more money, more data, more knowledge, and more skill.

We trade for fun but forget we’re in the ring fighting Floyd Mayweather and then realize it’s not much of a fight. It’s an embarrassment.

Mayweather vs. Tenshin was over soon after it started. After two and half minutes of watching Mayweather laugh, dance and deliver knockdown blows, Tenshin’s corner threw in the towel.

I’m sure Mayweather knew what he was thinking: $9 million for less than 3 minutes of work? I’ll take cash, please.

Don’t invest for the thrill or you’ll get a front row seat to Mr. Market laughing, dancing, and knocking you down.

***

You can watch a replay of the fight by searching “Mayweather vs. Tenshin” on YouTube.

Sources:
Floyd Mayweather vs. Tenshin Nasukawa (ESPN)
How your emotions get in the way of smart investing (WSJ)

Further Reading on this topic:
Trading more frequently leads to worse returns
The Illogic of Active Trading
What do investors want?

Now here’s what I’m reading/listening to:

Seth Godin on how to say “No” and market like a pro (Tim Ferriss Show)
Have I got a fund for you! (Intelligent Investor)
How LeBron James Became Stephen Curry (WSJ)
When things get wild (Collaborative Fund)
Spider-man paradox (Seth Godin)

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