It’s an interview of Mark Fenton-O’Creevey, professor of organisational behaviour at the Open University and David Jones, Chief Market Strategist at IG Index. The subject is Emotions and Financial Trading and it is an absolutely brilliant piece.
As an experienced private banker I cannot over emphasize the importance on understanding investing as an emotional experience. There will definitely, absolutely, as surely as the pope wears a big hat and the ladies at Ascot silly ones, that you will face a situation of crisis when you invest. The problem is that when these crises hit, most private investors are not equipped emotionally to deal with it and all their hard-earned gains can be lost. Think about this for a moment: Percentage mathematics is a mean old discipline. A stock goes down 50% it has to come up 100% for you to break even. I asked you to think about that for a bit. I now ask you to think about it again. Crises and percentage mathematics are the evil double tag team destroyer of portfolios.
When a crisis does hit, the private investor will capitulate at about the 50% drop and will start coming back to investing after the 100% rise. That’s how it works, I’ve seen it hundreds of times and will see it again, despite my hard efforts (I will see it less with my own clients, because when it comes to risk management I am not a pleasant cheerful employee of the month type. I am a demanding thoroughly unpleasant schoolmaster. If you want to go out and play, you’ll need to have certain things in order. If I work for you, you will control risk, otherwise find another banker. End of)
Once again I seem to be going on a bit. In this case it is appropriate as we are talking about emotions and investing. As is so clearly evident, I get emotional about risk control when it comes to investing.
So please, please, please watch this interview, pay attention, listen and concentrate. What you learn from this interview (if you follow the advice) will save you money. Control the risk, the profits will take care of themselves.
(Professor Fenton-O'Creevey has a blog called Emotional Finance, here's a direct link to the collection of columns he wrote for the Telegraph on the psychology of trading. You can also follow both David Jones from IG and professor Fenton-O’Creevey on Twitter)