When I wake up each morning, I take a drink from the blogosphere news fire hose in order to get caught up with what is going on in the world and to get a sense of how some learned minds are thinking about these and other developments. I find this process puts a lot of random ideas in front of me in a short period of time and often leads to some interesting juxtapositions that help stimulate my own thinking.
This morning had just one of those juxtapositions. First, in Olympics and Stocks Don’t Mix, Mark Hulbert cites the work of Edmans, Garcia, and Norli (“Sports Sentiment and Stock Returns”) which shows how World Cup soccer losses translate into significantly poorer performance in the local stock market the next day.
Hulbert weaves this research into his own observation:
“In my experience, few investors even recognize the role that their emotions play in their decision-making. When challenged, they are able to point to a litany of reasons, all well documented, for why their strategy is strongly based on a sound statistical foundation. But, most of the time, I still don't believe them.
That's because there are different types of reasons. On the one hand, there are the reasons that genuinely account for why we have decided to do something. And, on the other hand, there are the reasons that we turn to, after a decision has been made, to justify it to ourselves and others. Most of the investment reasons that I hear or read about are of the latter variety.“
Right after Mark Hulbert, I stumbled onto Brett Steenbarger’s A Dozen Thoughts on Trading Stress and Emotion. Frankly, I don’t recall ever having seen a short list that has so much for traders to chew on in the realm of “Know Thyself.”
There are many ways to look at the markets and how you interact with them, but one should never underestimate the emotional component on both sides of that equation.