Charlie Sheen's Image and Investing

2/25/11 Update: Charlie Sheen Proves Allan Roth Wrong!
In a recent Reuters article about Charlie Sheen, it referred to the much publicized "reports of heavy drinking, drug use, porn stars," and further observed that "none of that should be good for a Hollywood celebrity -- unless that star is Charlie Sheen." Contrasting Sheen's image with that of Mel Gibson's provides us with an important investment lesson.

Recent bad behavior and his popularity
Sheen's drinking and drug problems appear to have caused a shutdown of the CBS (Parent of MoneyWatch) hit TV comedy "Two and a Half Men." Yet a poll of viewers of this comedy shows that his image actually went up among some viewers. The findings of this poll include:

-- 56 percent thought that a future episode of "Two and a Half Men" should address Sheen's personal issues.

-- 96 percent of "Two and a Half Men" viewers wanted Sheen to return to the show, with just 4 percent wanting him to quit permanently.

-- 59 percent of all viewers believed that Sheen wasn't acting on the show but was actually just playing himself.

Charlie Sheen vs. Mel Gibson
As a contrast to Charlie Sheen, Mel Gibson's image continues to take a beating. I'm not sure whose behavior is worse, yet the contrast between bad behavior and image is startling.

Why are the consequences of behavior so different between Sheen and Gibson? Since I'm clearly not a Hollywood expert, my guess is that the difference may lie in consistency. And considering the poll indicated that 59 percent of people thought Sheen wasn't acting but actually playing himself, the expectation of good behavior appears to be lower.

Sheen plays a lovable drunk on the show who is basically good hearted, as is demonstrated by his willingness to take in and provide for his brother and nephew. Thus his bad boy behavior in real life is consistent with his character. Why should we change our view of him when he is merely behaving in a manner consistent with our image? Mel Gibson, on the other hand, has made a career of playing bigger than life heroes. There is no such consistency between Gibson's roles or real-life moral ramblings and his actual behavior. His sterling reputation seems irreversibly tarnished, which may in part be due to the fact that some view Gibson as doing more harm to others than to himself.

Consistency and investing
Consistency plays a key role in investing as well. In boom years like 2003-2007, our expectations tend to be optimistic and we anticipate more good times. And on the flip side, when markets tank as they did in 2008 and 2009, our disappointment leads to pessimism and our expectations are for the worse. Unfortunately, those changing expectations, known as recency bias, are the biggest driver for performance chasing.

The importance of consistent investing expectations
It turns out that having consistent investment expectations is critical to reaching your financial goals. Let's look at two portfolios - one aggressive at 70 percent equities, and one conservative at 30 percent equities. Between the end of 2007 and yesterday, the aggressive portfolio is up 2.6 percent while the conservative portfolio is up 6.9 percent. That's after yesterday's big decline.

Both of those portfolios did quite well in weathering the biggest financial crisis since the great depression. But in order to achieve these results, investors needed to be consistent in their behavior and stick to their asset allocation targets. Those investors who changed their expectations during this period, found themselves with portfolios that declined faster than Mel Gibson's image.

If you can't be right, at least be consistent
Stocks have always been risky and always will be. In times like today, when the US stock market is nearing an all time high, remember the risk involved and don't change your expectations to more good times to come. When markets plunge, remember that bad times don't last forever and there will be good times ahead.

It's important to get your asset allocation right. It's even more important, however, to keep your asset allocation consistently on target. That consistent allocation has you buying in bad times and selling in good times.

So if investors take a page from Charlie Sheen's book and set investing expectations right in the first place, the market's wild ride will be consistent with those expectations. That consistency may hold you through the bad times, much in the same way I'll still be tuning in to "Three and a Half Men" for some time to come.

In investing, it's better to be Charlie Sheen than Mel Gibson.

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