Emotional Aspects Of Investing

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One reader had the following questions in regards to controlling emotions when making investment decisions:

How long did it take you to be disciplined to follow your trend change in the contexts of all your emotions that a market may be just “”too high”” when it turns positive to reinvest?

Is that still a very powerful force? You even seem to hedge your rules a bit waiting for the price to go ‘X’ amount your trend line.

Is that a big advantage of a fee based service to invest others’ funds?

Being an engineer by training, I never liked any approach to solving a problem that did not have a clear projection of several possible outcomes along with potential solutions as to how to deal with them.

I guess the need to have some means of control translated into an investment strategy that at offered me an opportunity to try to make unemotional decisions, because I already had decided that I could live with the possible outcomes (via a sell stop discipline).

It’s simple but not easy. No matter how long you’ve been involved with investing, there is always some emotion involved; you just learn how to deal with. Again, if you can live with the projected worse case scenario, then that should limit your emotional involvement.

Most investors have a hard time with it, so for some it’s simply easier to have someone else make the decisions for them. That assumes, of course, that the investor is in agreement with the methodology being employed, especially with the exit strategy.

In some ways, it’s almost easier to handle other people’s money, because you’re not emotionally attached, although you are responsible for it. I try to educate people in advance so that there are no surprises later on.

Much depends on the client’s attitude as well. There are some, whose life consists of following not only every tick of their holdings, but they also tune into every silly investment show on TV. That’s usually counter productive to any investment approach.

I have some clients who simply have no interest in the financial markets at all. They live busy lives and just want to be assured that there is a plan in place to protect their assets in case disaster strikes. They look at the big picture and spend no more than a few minutes a month reviewing their statements.

Even when following a pretty straight forward approach such as trend tracking, there are still subjective decisions to be made. They are not necessarily emotional in nature but require “user input” so to speak. That usually happens at major inflection points when buy or sell signals get generated.

To avoid potential whip-saw signals, I let the Trend Tracking Index (TTI) clearly pierce its long-term trend line before pulling the trigger. That is what I consider “user input” and is designed to simply avoid unnecessary trading signals whenever possible. Sometimes, we have benefitted by such a decision and sometimes it did not matter.

The key is to systemize an investment approach as much as possible, but I don’t think you can expect that effort to reach the 100% level.

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Comments 30

  1. Ulli,
    I have no problem exiting my positions via my 7% stop loss but have a big problem getting back in. In this current cycle, FXI, EFV & RSP stopped out last week. Do I pick another fund and start the 7% stop loss again? Wouldn't that be the same as 14% stop with my existing funds?

    Thanks
    Kurt

  2. Ulli,

    I remember another trend following letter writer that had a somewhat similar program to yours starting back in the late seventies and he started making changes like waiting till so far above or below the 39 Week M.A.. to make a move then a few more little changes and then the man at the helm changed and the letter became worthless to me and I cancelled. Hope you aren't slowing going away by the same path that guy did.

    Getting in and out with a 39 week M.A. is always late anyway and waiting another 1-2% after it crosses that line just tells me that that method isn't very good to start with if it always has to be altered to make it do what you want it to.

    I believe that your recent blog article about buy & hold summed up thigs pretty well when Mom and Pop did better just stacking up CDs as compared to their peers buying and holding and or selling stocks etc.

    S.K.

  3. Ulli,

    I used to have a lot of interest in your work, but the longer I read these blog articles I am starting to have lots of doubts about the validity of this whole trend timing process that you are using. The more you add things like the so called "Simple Hedge Strategy", which really is only simple for you, but not us common folk out here. I am now questioning your method. I realize I don't have to read your blog, but have to admit that I do at times find it amusing.

  6. Ulli,

    I think soemtimes you are a little to abrasive in your replies. I hope you are not so coarse with your clients. This financial investing is very stressful for everyone. Instead of serving vinegar try a little bit of honey sometimes.

    I think Fred might have been looking for an explanation not the door.

    Your system may work well for you and it is proprietary, but it is not the only one that works. I have tried to share my TA system with your before and got the same treatment as you gave Fred…

    Just some positive feedback -please remove the chip off of your shoulder. You have a great blog and I appreciate your efforts.

    MK

  9. Ulli,

    I agree with MK that you are starting to be a little brash with your readers on this blog and I also agree that the socalled Simple Hedge Strategy may seem simple to you, but not the rest of us. If your system was really any good at finding trends to start with why on earth would you need to hedge it, to me that creates doubt about the whole thing as I have seen so many of these kinds of systems fail over time due to too much tweaking. It also seems rather interesting that when the market is going against your system as it currently is that you degree of brashness is in direct purportion to how much the market goes against you. Just a thought.

  12. Ulli,

    I am glad you ask about the last two bear markets. I use a very simple momentum approach to the market trend. I use a very adjustable chart in size both in height and width of the SP500 ($SPX)and Wilshire 5000 ($WLSH) on StockCharts.com as a member.

    I get in when that 200 day SMA line with the price removed turns up and get out when it turns down, very simple, but chart must be tall and narrow to fine turn the wiggles out.

    Out in Oct, 2000, in June, 2003, out Feb, 2007 and still out.

    It doesn't get any simpler than that, but thanks for asking. This also works well with bear funds during the downtrends unlike some other methods that I have experience with.

  14. Hi Ulli,

    There don't seem to be as many happy comments on here now that the long awaited correction may now be started who knows?

    Thanks for all your free info. and weekly letter.

  16. Ulli,

    Maybe you are being tested to see just what you are made of and if you pass the test then maybe someone will employ you to manage their money. Personally I like reading your comments and the comments of others on the blog, but of late you have been hit hard in my opinion. You are a nice person and when I e-mailed you with a question or a comment you always answered my e-mails quickly and I appreciate that. It seems that today for some unknown reason you have been unjustly used as a pin cushion by some people who are losing some money or having some other problem, who knows? I too really like your weekly letter and I understand why it is free because it generates business for you and that is great because you win and I win too.

    Thanks again,
    T.M.

  17. Ulli,

    To reply to the other question, use PSAR as your hard buy/sell signals. To sell with profit intact use RSI(8) above 68, to buy, use RSI(8) below 26. I also use a MACDh 5 dma comparision to be early in and early out…much better than hedging.

    MK

  18. If people want certainty they need to start putting money in the local bank saving account and get there .0111% return. If they are afraid of truth without all the sugar coating maybe Ullis blog is not for them. Personally I like your to the point responses. The world is turning into a bunch of crying whinning babies who dont like there feeling being the most important part. Its just like the political mess we are in right now as the majority of the people want everything served on the perfect plater without any work. Enough of my ranting as these cry babies are disgusting. A big thanks Ulli. Keep of the good FIGHT. Snobbers

  22. As an Investment Advisor myself Ulli, I took the posts by one or two readers as sarcasm as well. This is a free blog, they don't have to read your methodology if they don't want too. As far as getting in and out of the market, there are a number of ways to skin a cat. Find a system that has consistantly worked in the past and stick with it. Have a nice Holiday!

  24. Ulli, I am happy about your Hedging. It's just one more tool to make money safely in this irratic market. We need all the tools we can get and I appreciate all you do for us.

  25. Well it seems the free-loading deadbeats such as myself gave you a thorough tongue lashing as some of them may have had to dip into their pocketbook a little. Did they really think cause this approach is free it is a perfect guarantee. You have cautioned reems about entry on a new positive go signal. Looks like the deadbeats used any retort to unload. None of this had to do with your original response. If the folks cant handle a loss in their 5-10-20 year horizon they certainly should not be investing themselves or perhaps in the mktplace at all. Where do people think all the profit in the mkt comes from anyway. Its pretty much a zero sum game so it is the greater fool being clipped and sheared. The 1 or 2% usually charged over 20 years is well spent rather then changing like myself to another method everytime a wave comes along. The initial question was how does one side step emotion if the go signal was close to a "gut feeling" correction. Yours was discipline. And the emotion sometimes is to wait a day or 2. Nothing wrong with that. It doesnt change a methodology it confirms one and acknowledges as you said we are all human. If these gents think you have been brash well…

  27. Ulli,

    I am one of those deadbeats who just like to have fun and press peoples buttons, no harm intended, just like to get a rise out of you and the readers who probably are freeloading deadbeats for the most part, just look at that fellow who said he was a money manager too, he probably is a deadbeat just freeloading off you like everyone else is. If you charged a fee for this blog most likely all these deadbeat freeloaders would flee like a herd of bison. I learned a long time ago that free advice is only worth what you pay for it. Oh, by the way I am half German, but not sure which half since I don't drink beer, but do Polka dance, must be the lower half. LOL

  28. Ulli:

    I do not understand the comments about "harshness", but I was interested in HKs' comment. Just for the hell of it, could you enlighten me/us as to what PSAR, RSI(8) and MACDh5dma are. It's obvious that they are another methodology, but perhaps you could give me/us some basic details.
    From a happy camper,
    John

  30. Ulli,

    The dates of getting in and out that was posted earlier should say out Feb. 2008 and still out, not 2007 as earlier indicated. Sorry about that, my secretary was off that day and I had to type for myself. LOL 🙂

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