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Are You an Investor or a Moth?

An investor to moth comparison might seem a bit bizarre at first glance. But if you'll grant me some leeway here, I think I can show you the light.

Why moths like artificial light

The warm breezes of Spring are here and blowing in windows that haven't been opened for several months. And open windows are an engraved invitation for moths and other insects to come inside the house. Though moths are harmless enough, their frantic flapping around gets on my last nerve. Thankfully, all I need to remedy this situation is to turn on a light and grab yesterday's newspaper. One swat and my irritation is gone. It's almost too easy.

Moths make it easy because, for reasons unknown, they are attracted to artificial light. It's an instinctual urge. Unfortunately for them, they don't possess the brain power to anticipate the unpleasant outcome their instinctual urge is going to result in.

Human Beings vs. Moths
Since human beings occupy the top of the food chain, we obviously have evolved intellectually more than insects. Our ability to override our instincts/emotions, and to grasp the logical outcome of our actions, allows us to avoid the nasty fate that is unavoidable to the moth. That said, we have not yet evolved to such a degree that we have shed all of our destructive instincts.

Human Moth-like Behavior in Investing
From my frequent observation of what many people do with their nest eggs, I've seen some instinctive yet irrational behavior that results in these investors getting metaphorically swatted at a higher frequency than the moths in my house. Here are some of those instinctively destructive behaviors that demonstrate how investors go toward their own artificial light.

  1. Buy high and sell low - We instinctively flap in the direction of the hottest investments and buy them after prices have soared (can we say gold?). When prices plummet, we instinctively sell to reduce the pain and buy the next hot thing.
  2. Suspend common sense - Logic tells us we can't get high returns without risk. Somehow investors will stuff that logic in a box and, without hesitation, will buy products such as equity indexed annuities because a total stranger claims they'll bring a minimum 8 percent annual compounded return.
  3. Ignore data - We know smoking causes cancer as the data is quite compelling. Yet the data that high fees result in lower returns is far more compelling than the smoking-cancer relationship.
You can't ignore your instincts
As far as I know, completely logical beings can only be found in the movies or on television. Star Trek's Spock character had evolved to act out of pure logic, and even he had some lapses. But when it comes to investing in the non-Hollywood real world, we aren't just wired for logic. We're also emotionally wired which makes us vulnerable to those destructive, moth-like instincts.

The most we can do is be aware of them and try to control them by putting our frontal lobes in the driver's seat. I am often successful in doing this, but not always. And from time to time I get swatted, sometimes pretty hard, as I was back in 1980 when I bought gold at $664 an ounce because my instincts told me to fly towards the artificial light that doing so would soon make me rich. Luckily, that swat knocked some sense into me.

My advice
The next time you are about to make an important investment decision, ask yourself if you are thinking like a logical investor or an instinct-driven moth. If you are sure you are using logic, that's a pretty good indicator you are not. If you are questioning your motives, that's a pretty good sign that you have engaged your critical thinking skills and are using logic.

As a psychologist once put it to me - "Remember, humans are feeling animals that happen to think rather than the other way around."

Author's note: Picture from HowStuffWorks.com
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