US based asset manager Fidelity has this month produced the following short article which reminds us all of the importance of having a plan and investment process which we adhere to through all market cycles.
Priming is when you are exposed to a stimulus that subconsciously influences your response to another stimulus. If you are exposed, for example, to the word EAT or images of food, you are more likely to complete SO_P as SOUP rather than SOAP. The opposite would happen if you were primed with the word WASH.
The effects of priming have implications for investors in an age when coverage of investment markets is continuous and detailed. Given our susceptibility to priming, we should be careful about aligning with narratives that drive sentiment. For one thing, markets historically bottom before news on the economy improves. This presents a difficulty for investors who may have been primed on how irretrievably bad things are.
Many priming experiments have been held about money. The research suggests that when people have money on their mind, they become more self-sufficient and more self-serving. Subjects primed with monetary triggers such as a stack of Monopoly money or a picture of a banknote, for example, preferred to work alone and put more distance between themselves and new acquaintances. When someone dropped pencils, the money-primed picked up far fewer pencils than the unprimed. Priming, therefore, may mean that we want to be more self-sufficient, which can be good. That self-sufficiency, however, comes with the emotions of greed and fear and cognitive biases.
What can we do about it? One solution is to install an investment process as a defence against behavioural biases. By adhering to a consistent, repeatable investment approach (or an investment manager who does), we can take the emotion out of investing. By focusing on process – investing, for example, only in high-quality companies that pay a sustainable dividend – investors can stick to a system that limits susceptibility to priming and other decision-making traps that dog less-experienced investors.
Without an investment process, investors are more likely to swallow the shifting stories that move markets. It is easy to subscribe to the view that we should buy when others are despondently selling, but more difficult to do it. To overcome our emotions, an investment process that acts as a rudder – or investing with a manager who has a process that you understand and subscribe to – helps navigate a difficult investment landscape typically made more treacherous by our emotions.
Source: Fidelity Worldwide Investment – April 2015