Here’s a great interview with Michael Mauboussin on the Value Investing with Legends podcast. During the interview Michael provides some great insights on how stress affects investment decisions. Here’s an excerpt from the interview:
What we know is that stress tends to shorten peoples time horizons. That makes enormous sense evolutionarily. Because if you’re the zebra running away from the lion you’re not thinking about what you’re going to do in two weeks. You’re thinking about the next twenty seconds trying to survive. If I stress you, not just in markets but in any context, that’s why we say don’t make decisions when you’re stressed. Why? Because you’re only thinking in the here and now and its very difficult to think in the long term.
I recall vividly by the way in the financial crisis that we had an analysts talking to our portfolio managers and they would say, here’s a stock that I think looks terrific, I think we can triple our money in the next few years. And the PM would say, if I have this stock in my portfolio and it goes down my clients are going to fire me. So there’s professional risk that comes into play that’s a manifestation of stress because if you have a three year runway it would certainly be a great investment. So these things all come into play in a very big way. That does lead to… there’s a self help component to this.
You can listen to the entire interview here:
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