Thursday, May 20, 2010

Financial Addiction

Have you ever tried to quit smoking? All the education in the world doesn’t help. They can tell you about diseases and show you graphic photographs of cigarette sickness; they can make laws about where you may or may not smoke – but that’s not what it takes to quit. In order to shake that addiction, you have to suffer through the withdrawal symptoms. You have to feel those urges and not satisfy them. It’s your will against the addiction: and you have to win.

In my book about investing, Beyond the Bull, I discuss the concept of financial technique… the opposite of addiction. A financial technique involves scanning the economic world for certain events, and react to them by buying or selling our investments in a preplanned way. And it’s about learning from our experience. It’s a way of using ration and reason in our investing. But, that doesn’t work for some people. For some people, no matter what the economic world does, they keep right on doing what they’ve always done. Are they addicted? Are “buy-and-hold” investors and their advisers addicted to the stock market? Is it some perverse form of gambling addiction?

I have written several articles hoping to alert people to the dangers of investing in these times of financial change. Check this site: (

On May 13, Financial Frost – in May pointed to the dangerous and dramatic increase in volatility in the markets. On May 6, Helen’s Greek Restaurant highlighted the twenty first century phenomenon of millions of people borrowing way more than they could ever hope to repay. On April 30, Brain Feel vs. Gut Feel reviewed another indication that the stock market is topping: the excess optimism of stock market investors. April 22’s Price Tag on a Viking Curse highlighted the Icelandic people’s defiance of their own government when they voted to default on their government’s loan guarantees. In Trudeau was Right on April 14 I told how the old rules of investing had become obsolete, and new rules were emerging. The game has changed. On April 14, Consequence of Error showed that there are times to take risk and times to avoid risk. On March 31, I discussed why house prices will fall in the last half of 2010.

The common theme in these articles is investor education: if investors know more about risk, they can protect themselves by selling out of a falling stock market. But logic and reason won’t work for those who are addicted to the stock markets. Like the alcoholic, they’ll have to hit rock bottom before they’ll change their habits.

What’s it like for a stock market junkie to “hit rock bottom?” When an alcoholic or drug addict sees his life ruined, or when a smoker gets his first heart attack, he becomes open to change. Is it the same for buy-and-hold believers? How much money will they have to lose before they see the problem?

Alcoholics anonymous is a sophisticated program to help alcoholics overcome their addiction. Step one is admitting you have a problem. Maybe those who are frozen in investment paralysis don’t realize they have a problem. Is that possible?

Not only is it possible, it’s intentional. Sophisticated financial salesmen continually tell us everything will be OK and it’s fine to hold your stocks and even buy more at any time. Any down turn of the stock market is merely “a correction” – it went up too far too fast and is correcting down to a normal level. They command an array of skilfully crafted charts and statistics to intentionally portray the stock market as safer than it is. No wonder the investing public is hooked on stocks.

My book, Beyond the Bull, takes a cold look at monetary reality: the financial world is rife with sophisticated intelligent salesmen who influence people owning billions of dollars in investments. We are not merely talking about fast-talking hucksters conning unsophisticated small investors. The big American investment firm Goldman Sacks has been accused of conning the most sophisticated institutional investors in the world. Large and small alike, these are the investors from whom the salesmen make their living.

This is where the addition occurs. Those who rely too heavily on one adviser/salesman should ask themselves if they are somehow hooked on the charm and the intelligence of that financial salesman.

Our advice is simple: check your monthly statements. How have you been doing over the past ten years? Most Canadian stock market investors will be disappointed when they realize how poorly they’ve done. Most American investors will be angry – they’ve lost money, on average. Once people realize the buy-and-hold approach no longer works, it is easier to sever their relationship with the charming and intelligent salesman to whom they are addicted.

Those readers who have both quit smoking AND ended a long term relationship will tell you it’s sometimes easier to quit smoking.


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