The Pros Were the Dumb Money

09/22/2008 12:00 am EST


Terry Savage

Author, The Savage Truth on Money

Gotcha! That’s what the market said to all those investors who panicked and sold out of fear on the way down last week. And guess what? The ones who panicked most were the professionals! 

They’re supposed to know better. After all, they’re paid big bucks to manage money in the markets. Yet, it was the pros who executed those huge block trades just to get the financial stocks off their books before third-quarter reports went out to their suffering shareholders. 

And it was the pros that pulled millions, and even billions, of dollars out of money market funds (like the Putnam Prime Money Market Fund), because they worried not only that those funds held Lehman Brothers’ paper, but also about the entire corporate borrowing market.

So-called sophisticated professionals around the globe panicked and piled into Treasury bills, pushing yields to nearly zero, just as the Treasury was creating billions of dollars in bailout credit.

Ordinary investors became the relatively smart money. Perhaps it was fear that paralyzed many people, and kept them from selling instantly. Or maybe it was because they use mutual funds and know that the daily prices are set after the close, causing most people to pause and pray for a rebound.

This is not an argument that buy-and-hold investing always works. The impact of the financial crisis will certainly take its toll on the broader economy. And there is a good chance that stocks ultimately will move lower to reflect that.

But it is an argument that smart investors resist those two emotions so closely tied to human nature: fear and greed. Greed got us to this point. Fear destroyed billions of dollars in assets instantaneously.

Denise Shull is president of TraderPsyches, a New York consulting firm specializing in teaching better methods for human decision making in the financial markets. ( She and her staff of three modern psychoanalysts work with traders to teach them how to use their emotions to their advantage. 

How did those teachings work this past week? 

Says Shull: “It’s a myth that you can control your emotions. Neurologically, you can’t. But what you can control is your actions—if you understand what’s really driving your emotions.” 

“The trick is to view emotions as information, allow yourself to understand and identity your feelings, and only then make a fully informed decision,” she continues.

This process involves more than trading discipline, Shull explains.

“When you try to control [your] emotions or deny them, inevitably that energy will push you into taking an action that, in retrospect, will always be irrational—and expensive!”

That’s as true on the most sophisticated trading desk as it is for the individual investor—maybe even more so, as we saw this week.

So, how did you deal with the emotions of this past volatile week in the financial markets? Did you do anything that you now regret? What will you do differently the next time around? And do you think this rally is for real?

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