VALUE: After Hours (S07 E13): Panic Selling, Risk Off, and Behavioral Finance

During their recent episode, Taylor, Carlisle, and Barry Ritholz discussed Panic Selling, Risk Off, and Behavioral Finance. Here’s an excerpt from the episode:

So, if you’re uncomfortable at a 70/30 or 60/40, because you know you need this money, you want to make sure that you don’t do anything silly. You mentioned the study that showed 31% of people who panic out in markets never return to equities. And that study comes post-financial crisis. So, imagine panicking out January, February, March and then missing one of the greatest decades in market history.

Jake: That double dip, it’s coming. You just got to–

[laughter]

Barry: We started talking about humility. Part of the reason the people who sell don’t go back in is they don’t want to admit they were wrong. They don’t want to say, “I was wrong.” When I was on the desk and anytime I put on a discretionary trade, I would write a little bit, a couple of notes about it, “Here’s where I’m getting in. Here’s where I’m buying it. Here’s my upside target, and here’s my stop loss.” When you’re objective and you’re not freaking out because down 10%, up 12%, down 6%, when you’re calm and rational, you can make those decisions. You just have to trust your earlier self to follow those rules.

I like to tell people, “You read the card on the back of the seat back in front of you while you’re waiting your turn to take off. Not when an engine flames out at 30,000ft. You’re probably not in the best state of mind to make good decisions then.” So, cut a deal with yourself. Write your own little contract with yourself. So, that’s one thing.

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