Distinct sub-personalities common in investment advisors' profiles can lead to catastrophic consequences
NEW YORK, Jan. 30, 2014 /PRNewswire/ — Best-selling author, Forbes contributor, and renowned financial advisor & psychologist Dr. Phil DeMuth says, "The simultaneous presentation of Nobel Economics Prizes to Professors Fama and Shiller, who hold diametrically opposite views of the stock market, illustrates a fundamental problem with the state of financial economics today. However, there's good news: this problem completely disappears once you realize that investors are insane."
(Photo: http://photos.prnewswire.com/prnh/20140130/PH55470 )
As DeMuth describes it, investors have two distinct sub-personalities. There is a conservative "Dr. Jekyll" type, who only cares about downside risk. Jekyll prefers gold and Treasury bills. He is counterbalanced by the thrill-seeking Mr. Hyde, who writes naked calls on margin. The problem arises because both of these investors uneasily co-exist within the same human being.
Advisors Are Dazed And Confused
Investment advisors are dazed and confused by their client's behavior because they assume they are dealing with a unified individual. Instead, they never know which sub-personality they will get on the phone. It invariably turns out to be the opposite one from the last time they talked, calling to complain that everything done based on the previous conversation is wrong.
Buy High, Sell Low
The split personality that emerges is the one who is winning now. Gold goes to 2000? Jekyll can hardly wait for China (Europe) (the Middle East) to collapse. Is the NASDAQ at 5000? The next stop for Hyde is Dow 36,000. Then, when the market turns, the other personality pops up and sells everything at exactly the wrong time.
Catastrophic Consequences
As DeMuth describes it, this schizoid investment process leads investors to precisely the clinical situation in which they find themselves:
— Perpetual dissatisfaction and misery; sleepless nights under all market conditions
— Always hunting for some new thing that will resolve the contradiction (hedge funds? structured products?)
— Severely compromised long-term investment returns; retiring on empty
About Phil DeMuth
DeMuth's first solo endeavor is The Affluent Investor. He's co-authored nine bestselling books with economist Ben Stein (including theYes, You Can series Yes, You Can Get a Financial Life, Still Retire Comfortably, Supercharge Your Portfolio, Time the Market, Become a Successful Income Investor, Can America Survive?) and "The Little Book of Alternative Investments and Bulletproof Investing…" series). Both a psychologist and registered investment advisor, he's written for The Wall Street Journal, Barron's, the Journal of Financial Planning, Human Behavior, and Psychology Today. He's been quoted in The New York Times, Fortune magazine, Yahoo! Finance, theStreet.com, On Wall Street, "Profiled for Success" in Research Magazine, hundreds of outlets, and CNBC, Forbes on Fox, Fox & Friends, FBN, Bloomberg, WEALTHTRACK, and Wall Street Week with Fortune. He's Managing Director of Conservative Wealth Management LLC, a SEC-registered investment advisor to high-net-worth individuals and, their families.
Articles can be found at http://www.forbes.com/sites/phildemuth/
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