The paradox is that if you do not have complete control over your emotions, you can have too much information for your own good.
Last week I bought shares in Royal Bank of Scotland ahead of the company’s results. These were ahead of market expectations and the stock, purchased at £20.40, ended the week at £20.75. You would expect me to be pleased, and I was – until I noticed that in last week’s volatile markets, the price between times had dipped below £20.
Regret is a powerful, and useful, emotion. Former US defence secretary Robert McNamara’s regret for his part in the Vietnam war produced a thoughtful analysis of what went wrong. The regret that Jeffrey Skilling, former Enron boss, and WorldCom’s Bernie Ebbers no doubt experience in prison is salutary for other executives. People who do not feel regret are not only morally deficient, but unable to learn from their own experience. There are people – think US president George W. Bush or the media magnate Robert Maxwell – who appear immune to regret. They make bad mistakes and damage the lives of others.
But regret for not buying RBS shares at £20 serves no useful purpose. The opportunity to buy at that price on Wednesday afternoon has passed. Even if the chance comes again, which it probably will, a purchase will then have to be justified on its own merits. There is nothing to be learnt from last week’s market gyrations except that what goes up usually also comes down.
But emotions are not things we can easily switch on, or off. I envy, but am not, the person who would have experienced no regret when they saw Wednesday’s closing price for RBS. Almost everyone keeps an eye on the price of shares they have just sold, even though this information is no more relevant to your investment strategy than the price of a share you have never owned. If you did not react in these ways, you would not be human.
But the paradox is that if you do not have complete control over your emotions, you can have too much information for your own good. Many investors have just spent a nervous weekend. But someone who fell asleep over Christmas lunch and woke for St Patrick’s day would be entirely relaxed: his portfolio would have barely changed in value.
Nassim Nicholas Taleb, the trader and author, illustrates the curse of knowledge with the example of the investor – call him Warren Buffett – who substantially outperforms the market over the long term. If Warren looks at his portfolio only every five years, the results will almost always be encouraging. If he reviews his investments annually, he will have observed more good years than bad ones. But even a successful investor who looks at his portfolio every day can easily become depressed. Fifty one per cent good days and 49 per cent bad days will produce a good result, just as someone whose coin tosses work out 51 per cent of the time will become extremely rich. But it may not feel like that.
For those who follow events too closely, the pain of regret can far outweigh the joys of success. Life, and markets, contain so many missed opportunities. Such feelings provide the best explanation as to why the equity premium – the difference between the return on shares and the return on safe assets – is so high.
This also suggests strategies for both eating well and sleeping well, getting the higher yields from investment without the psychic costs. Do not suppress regret – that will make you a worse decision-maker as well as a nasty person. But learn to control regret: know when this emotion is useful and when not. Accept that most market movements are statistical noise that convey no information about the past and provide no guidance about the future. Judging your fund manager on monthly or quarterly performance will give you a lot to talk about, but nothing useful to say.
Monitoring your portfolio every day will impose a high emotional cost for negligible financial benefit. Turn to the comment and analysis section, not the share prices, when you open your Financial Times. If I had followed that advice I would never have known how cheaply I could have bought those RBS shares and been a happier man. Many investors will have concluded that the current turmoil makes it vital to be close to the market. The opposite conclusion is true.