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He knows the investors mind
Ask any investor what his or her goals are, and the answer is likely to be:
But in reality, that obvious answer is more than likely incorrect, says Paul Heys, who has been studying investment psychology for years. And the gap between stated objectives and underlying objectives is the investors worst enemy.
People have a financial need to be financially secure, he said. But they have a psychological need to appear financially secure.
That psychological need, Heys says, drives a lot of spending decisions, like spending more than necessary on a car perceived as conveying status. Less obviously, that same need also drives a lot of investment decisions.
Some peoples real motive is to go to a cocktail party and show how smart you are, or to get an adrenaline rush, he said, explaining why otherwise sensible people rush to put money into the latest go-go stock.
What is needed, Heys believes, is more investorship, a term he coined and copyrighted to describe the craft of fruitful investing.
Fittingly, his office is on the Investorship a 50-footer moored at an Eagle Harbor marina.
The boat is a novelty, he said, but its also a metaphor for what investors need to do staying the course, battening down the hatches and adjusting in the face of adversity.
The most important component of investorship, Heys said, is self-knowledge.
People are naturally risk-averse, he said. They suffer twice as much pain from a loss as they do pleasure from a gain.
Knowing that about oneself can prevent the most typical investment mistake buying high and selling low.
When a stock is going up, people want to buy, and when its going down, they want to sell. Rather than follow those gut impulses, Heys said the skilled investor accepts rises and falls as normal.
People need to understand what they should fear and what they should not, he said. When investments fluctuate, things are not going wrong theyre going normally.
The value of value
Investorship doesnt concentrate on what to invest in, but rather, on how to invest.
You need to adopt a strategy and give it a chance to work, Heys said. Over the long haul, the best investment strategy has proved to be so-called value investing buying stocks that are priced low relative to the intrinsic value of the company.
Then the investor needs the patience and discipline to let those stocks appreciate, not being distracted by periods such as the late 1990s, when value stocks were languishing while the market chased speculative tech issues.
Heys also pays attention to the spending side of the equation.
Getting people to understand the future value of money spent is very important, he said.
For example, if an 18-year-old buys only one latte per day instead of two, that $2.25 per day, invested at a conservative rate of return, will be worth $1.4 million at age 65.
Preaching the virtues of investorship is Heys third career, after retiring from the financial services field and an earlier stint as an Air Force pilot.
For a time, Heys and his colleagues University of Washington psychologists were offering their insights in the form of seminars, for which they charged a significant sum.
Now that he has moved to Bainbridge from Bellevue, though, Heys thinks of himself more as a consultant and educator.
He is also interested in forming a non-profit investorship society on Bainbridge, and in working with the schools to bring investment education to younger adults.
Recent events make the need more apparent, he said.
You look at Enron, or at the HMC thing right here on Bainbridge Island, he said. The people who invested in those companies werent stupid, or they wouldnt have had the money to invest.
But they were not necessarily investing rationally. This is a great time for a call to reason.