Most people think of doctors and lawyers as being smart people, mainly because they have to go to school for such a long time to earn a degree in their respective fields. And they are usually quite bright people, at least in their own fields and when it comes to making good grades in school. But as a rule they make the worst investors and gamblers of anybody on the planet. I think it's partly because they have to put so much time into learning their own occupation that they don't have time to learn much else. The other reason, I think, is how they view the world; something restricts their ability to reason when it comes to things outside their realm of study.
People quite simply like exotic, big name investments. Glamor sells. Plainness doesn't. Food is better when it is well dressed and served in colorful conditions. A gift is better remembered and more well thought of when given fancifully wrapped. Sex is served up better in silky lace rather than coarse wool. In the Bible, to keep the line going, Tamar dressed herself in fancy clothes and hid her face from her father-in-law Judah to seduce him; the beautifully dressed surprise package, as it were, is always more alluring. Femmes fatales never ply their wares in plain clothes. Male gigolos wear their slinky shirts open to the waist, snug their pants up their butt crack, and strap their genitalia tightly in their pants—all veneer and whitewash—to con lusty females into believing they are romantic sex gods who can provide them with something they've never had. Both prostitutes and gigolos are excellent marketeers.
Check out a new car lot next time you pass one—you don't get the cars alone. There are colorful banners and signs with polished cars sitting beside glistering buildings. Often they'll have an American flag the size of Scotland hanging around somewhere; they know that Americans will buy patriotism over most anything. Stock and bond hucksters as well as the local car salesman know these things are powerful seducers. To get you to take the first bite, stock salesmen will most often offer you a company with a powerful brand name—one that everyone knows well. So then, you say, "Oh yes Coca Cola or General Electric or IBM must be great investments; everyone buys from these companies." Gleam, glamor, and glitter. All these seduce us to buy.
A few years ago when AOL was on the front page every day and its stock price was around $160, a friend who invests with us has a brother who told him he had better buy AOL because it was a lock investment. Being pretty savvy about evaluating whether a stock is a good buy or not, my friend told his brother that it was selling for around 600 times earnings and was thus not in a category of stocks that he would buy or that he (his brother) should buy. The brother, of course, didn't listen, and although AOL has been as low as $10 a share he's not interested in buying now and doesn't talk about stocks. The glamor is gone. The drastic price drop has smothered the sheen with dung; nobody wants to bend over and clean it off to see if there's anything under it.
People look at money everyday the same as Vegas Bill. They go shopping with money that's meant especially for them to buy just anything they come on, whether they need it or not. I don't know how many people I'm in contact with who have what they call "mad money"; it's money they've put aside to spend in foolish ways they wouldn't dare normally spend it. Women generally do this for superfluous shopping, and men do it for their hokey hobbies. Unlike animals, humans can rationalize any form of craziness.
People ask me all the time about "putting money into the market." I, of course, tell them they should look at it as buying into specific businesses. They say they don't know what to do. Except for very close friends whom I know are too busy running their own businesses to do the research themselves, I don't at all like telling people what stocks to buy, so I always try to get them to think for themselves. Buy the stocks of companies that sell your favorite products I usually tell them. Most of the time I get a blank stare. They then go right on and listen to a "stock broker," who is in actuality a salesman who has to hustle stocks to make quotas company executives decide on—and place on his back which forces him to push junk to his clients.
When people want to know about buying stocks I ask them how much they have to invest. Many of them say all their money is in savings accounts, but when they get some they want to put "it in the market." I tell them they can put the money they have in savings accounts into the stocks of good businesses; that they'd be better off. But they say: "No. We can't put our savings in the stock market!" "Irrational money thinking." After taxes and inflation savings accounts were losers over the past century every year but three!! Try to pick a winner against those odds and see how you come out!!
Investing gurus tell you to put some of your money into "high growth stocks" (read not a hair's breath chance in hell of ever making as much as a rusty dime). Part of it should be in "conservative stocks" (read stocks with familiar names priced about equal to a custom Bentley). Some in "bonds" (read an investment whose price doesn't fluctuate so they'll feel safe, but grows in value about as fast as a seventy-five-year-old midget). To recommend spreading money out in this manner, the guru has to believe that some of these "investments" are better than others. So why not put everything in that one? More "irrational money thinking." And also he can't have much knowledge about what he's doing if he can't tell a client which area is the right one to be in.
In order to draw some of the customers who got burned in the March 10, 2000 crash back into his brokerage firm, broker Charles Schwab ran a commercial showing him telling a group of people who're shaking their head in agreement with him that if you "have a little money in stocks, some in bonds, some in cash, you can weather any storm." Tell that to investors who were around in the early `70s when stocks and bonds crashed and stayed down for years and inflation ate into them like hungry termites into soft wood. Schwab is a salesman. He knows that telling people to spread their money around makes it sound safe and more importantly makes them feel safe. What do you think Warren Buffett would have been worth today had he listened to Schwab and the herd's advice? Buffett's name would have been as obscure as a winner in the dot.bomb sector.
What about stock analysts who love a stock at $50, but hate it a few months after it's crashed to $20? People who follow them should ask these quacks what they're basing their recommendations on in the first place? How can they be that wrong about the outlook of a company in such a short time? Obviously, they're looking at prices and not businesses. (You have to thank God for these type of people, though, because they help run stocks up past any reasonable person's concept of value, and vice versa on the down side. Both situations create opportunity for the rational, opportunistic investor. And that is what we attempt to be.)
It's a fact that people feel safer when they have plenty of cash stashed away rather than having it in stocks, even though cash has been a loser across the board over the last century versus not only stocks but also real estate, gold, silver, and most all other investments. "What's wrong with having your money in cash," they adamantly ask. More "irrational money thinking."
Part of the fear of owning stocks is that people can see the price fluctuate every day, up or down. If they're up they fear they're going to crash; if they're down they fear they're going even lower. But they at least have a chance of getting ahead with stocks whereas cash is a sure loser, just as gold and silver have been (until recently), for the most part, over the last century versus stocks.
People don't fear losing money they've invested in their cars though. Think about it. How often do you hear someone say, "My car has really depreciated this year; I've lost a bundle on it." "Like maybe," never! But what if the media posted the value day after day of those big ole SUVs people love so much. The first year they lose 30%, the next 25%, the next 15%. They'd be sick then. The price of bicycles would shoot through to outer space in days. SUVs would be about as popular as admitting that you believed in the Y2K Con. Think about it.
Most people would fear owning a house if the media published weekly home price fluctuations. Home prices fluctuate over a period of a year as much as 20% each way. What if after just paying $200,000 for a home, home sales went in the tank, dropping 20%, and the media published a home price index. The home buyer checks out how his house is doing and it's worth $40,000 less than what he paid for it. The streets of Washington would be full of protesting marchers. Hell could generate no fury like what you'd see steaming from mad home owners. Yet the same thing happens to every long term home owner; they just don't know it because there's no home price index they can check. And on top of that, when people do hear that home prices have crashed they flock out to buy them, just as they do SUVs when dealers advertise that their prices have dropped in those last-chance-to-be-a-big-sucker sales.
Stocks are the only thing I know of that people run away from when they go on sale! Think about it! But let Wal-Mart have a sale on lawn mowers or shower curtain rings, and there'll be a line from Timbuktu to Kalamazoo. If the price of soap goes up, the same people who fly after stocks when they rise in price would go stinking and nasty until the price of soap comes down. When stocks are at their highest, you can't dynamite people away from buying them. They love stocks then; they feel good. Stock bargains scare them. Such is "irrational money thinking."
During vacation time in the summer when gas prices go higher around the country, most people drive a little less. The high price runs them away and restricts their buying. For the strangest of reasons the exact opposite occurs with stocks. It's classic "irrational money thinking."
Just think how many media people and stock analysts came on the investment shows and news over the past years acting all depressed with hangdog looks, because stocks were so far down. I don't know how many people I talked to who were sick over how far down the market was, yet they still had money to invest; but wouldn't dare buy anything at that time. They wouldn't rush to the sale; they ran away from it. Stock price movements, especially to the downside, drives fear through the herd. They don't see opportunity; they see doom and gloom. "Irrational money thinking."
Granted it's hard to stick your toe in the fire when it's at its peak heat; but when it's at its peak is when it soon has to turn the other way—and get just right for warming. Such is the way of stocks—when everyone hates them and everyone says "the Bull is dead; only the Bear lives," then it's time to stick your toe in for a taste. Remember, for over 200 years stocks have gone up overall by a high percentage—there's a high probability that they're going to do the same over the next few years.
When the DOW Thirty Index crashed 500 points to about 1400 in one day in October of 1987, I urged everyone I knew to buy immediately. One friend said, "Are you crazy??!! What, why, buy what??!!" I was about to give him 7 stocks that our group was buying then, but as soon as I got past Quaker Oats, he stopped me with a few choice words. A few years later when the DOW was booming past 9000 he was fully into buying at that time, and had forgotten when he wouldn't put a dime in when the Index was 7600 points cheaper. Such is "irrational money thinking" and investing with a herd mentality.
Another type of "irrational money thinking" is what I call the "if I, coulda, woulda, shoulda, mighta, I wish" form. Here's the way it works: A stock people own goes up to a point and then comes down; the owner immediately says, "I coulda sold; I shoulda sold; I wish I hada sold." This goes on over and over when stocks go down, as well as up at which time they say they "shoulda bought." Rational thinking always asks in every situation, "What should I do at this point?" Not at a point in the past that you can't go back to. This type of "irrational money thinking" leads to indecision, fickleness, and living in the past, where the person is always dwelling on what could have, should have, might have been.
Think these things over. Don't rationalize! If you have a problem with a tendency toward following the herd or with "irrational money thinking," face it. Create habits that will keep you from doing either one. Look at the world as it is. If your mate is beautiful and rich, that's great. But if he or she is mean, you need to tell him or her and get them to face how they are—and you need to face it too. The negative part in a proposition will not go away simply because you don't address it; in fact, it will most often get worse.
How many people have you heard say something on the order of, "My mate is a great provider; he (or she) works hard everyday to provide well for our family"? But that person doesn't mention the fact that the same man beats her or another person might not say a thing about the woman who tongue lashes him at every turn (and tongue beatings over the long haul are every bit as bad as fist beatings).
Force yourself to face the world and how it is—and how the people you know are—in both good as well as bad terms. No proposition is 100% good or bad; there are normally tidbits of both within every one. Search for both the good and the bad, and try to weigh the two up. But focus on getting rid of the negative if it's possible. If it's not you may have to jump ship. Nothing wrong with pulling out of an investment when you're a little loser, if you think things are not going to improve in that one little negative area. Better to cut your losses short, than bust out your whole bankroll. This type of thinking will help you to face your weaknesses when it comes to money management.
To beat the "herd mentality," simply try to restrain yourself from going the way everyone else is going. Create the habit of telling yourself things such as this: "Just because everyone else is going in debt to buy a fifty-foot flat-panel TV, doesn't mean I have to put my ass over a barrel making TV payments for the rest of my life as they're doing." Everyone starts buying white cars you can bet it's a fad that will cost you much more to buy into than the same car in another color will; and soon the fad will fade and cost you even more when you decide to sell to chase after the newest color scheme that smart marketing agents have come up with.
Investing is the same; when you hear promoters coming on TV telling you that you must buy here or there, rest assured that it's late in the day for that sector, and the flatulence will soon come oozing out right into your face—if you stick your snout in for a sniff.
Think for yourselves. Talk to trusted friends that you know are on your side, and finally, make your decisions—then stand by them without regret. If you misjudge, be manly and say that you did it yourself—but learn from that mistake. If you do well, then gain confidence so that you can go into battle again with more knowledge weaponry at your side.