Why does the stock market mock us?

Sometimes it feels like the stock market is mocking us—intentionally doing the unexpected. When we invest new money, the stock market promptly falls as if it’s punishing us. Other times, it jumps up after we had sold some shares. If you are an investor, you will encounter this sooner or later.

I’ve certainly experienced it many times in my investing journey. For instance, I bought Amazon shares in 1999 when the stock market was near its peak—only to see its shares cut down by 80% over the next two years. I wrote about that experience in a previous blog post here: My lucky break with a Roth IRA.

Other times, the mocking action might be a bit delayed. I started investing in a Schwab index fund in late 1996. The market went up the first three years but then crashed and stayed below its peak for the following seven years. See this post: My ten-year odyssey with a Schwab index fund.

But we know that it’s all in our heads. The market is not looking to mock us or beat us. It’s just that we tend to remember it that way. Of course, bad investment decisions often do get punished, but not always. We feel the pain of a loss twice as much as the joy from a gain. It’s called Loss Aversion. It’s a pretty well-known phenomenon in human psychology. See here. Because losses (even those that are just on paper) hurt much more than gains, we tend to remember them more vividly. We can even get mental scars from them.

Ken Fisher in his book The Only Three Questions That Count calls the stock market The Great Humiliator (TGH). What does he mean by that? The market humiliates investors by turning against them—causing near-term losses and anguish!

It all goes back to TGH – how else can you explain why investors mobbed the stock market in February of 2000 and bailed out in lockstep in time for the bottom in 2002? TGH tricked them, that’s how …

The Only Three Questions That Count, Ken Fisher

This is not too surprising. We know historically individual investors in mutual funds consistently underperform the stock market. They turn exuberant at market highs and panic when prices are low. And then the market humiliates them by doing the unexpected.

The market itself is of course not a living entity. It’s not out to intentionally mock or humiliate us. Mocking and humiliation are just mental constructs for us, the investors. They are useful images. They help us anticipate adverse reactions whenever we make an investing decision. Buy some shares and then anticipate the market will offer those shares even cheaper to you. Sell some and expect the market to go up from there. I, as an investor, never expect myself to snag shares at the very bottom or sell at the very top. It just doesn’t happen to me. So whenever I buy or sell, I mentally prepare myself for that stock to move in the opposite direction. And the inevitable thoughts that come with that experience like … I could have bought it cheaper had I waited for two more weeks. Or that I could have made more money had I waited a bit longer to sell.

Stock prices move randomly in the near-term. Chances are you will encounter similar feelings when you buy or sell. We just need to remember that we are long-term investors. Judging a buy decision after two weeks or three months is not a good strategy for us. We need to be patient and evaluate our investing moves in three to five years instead.

In a previous post, It’s not healthy to check stock prices every day, I pointed out how even if I were such an outstanding investor that I’d make year-end profit 93% of the time, I will still see losses nearly half of the time if I check my portfolio every day. Near-term random price movement crowds out any long-term investing trends. Once I’ve made an investing decision (buy or sell), there is no point in checking price movement every day or every week. Once a quarter check is probably good enough.

If you are taking a mechanical hands-off approach to investing like I was in my early years, those buy decisions come at a regular interval and regardless of price movements. A yearly portfolio check is all it takes. As I wrote in this blog post, Be mechanical about your investing approach, key to success then would be to not let opinions, emotions, and random noise detract us one way or the other.

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