Don't get mad ?

PORTFOLIO POINT: When things go wrong, don’t get angry, learn from the experience to become a better investor.
When markets go sour, we all look for someone to blame. Consider these recent news items:

• Kevin Rudd blames greed for the current financial crisis.
• GPT becomes the latest in a long line to blame its chief executive, who was promptly sacked.
• ANZ staff take out restraining orders on aggrieved Opes Prime clients.
• Eddy Groves loses his fortune and his company; now even his ex-wife is suing him for the value of shares that she says he sold without asking.

It is human nature to look for someone to blame. Then, when we find someone, attention soon turns to punishment. As a psychologist, I concentrate on the emotion that lies beneath a desire for vengeance. It is, of course, anger.

Anger is entirely understandable, especially in cases such as Opes Prime. ANZ appear to have gained security over the shares they sold just a week before things went awry. Few people could accept that with equanimity. That said, investors need to be careful when they find themselves getting angry. It is a dangerous emotion that needs to be quickly dispelled.

Causes of anger

Anger has various causes. Pain is one. Anxiety is another. But by far the leading cause, especially for investors, is frustration.

Frustration arises when we are prevented from reaching goals. The link with anger was first demonstrated in the 1940s, when experimenters made a group of children look at some toys through a window. As they watched, another group of children started playing with the toys. When the first group eventually gained access to the toys, they were so angry that they smashed them.

We investors like to think that our emotional responses are more sophisticated than that. But my experience is that adults merely express anger in ways that look more mature. Sacking a chief executive looks like a reasoned decision “in the interests of shareholders”. Really, it is just a grown-up way of saying, “He did it, and now he has to pay”.

Frustration worsens when there is a lack of personal control. If people feel that goals have been thwarted by others, as in the case with ANZ and Opes Prime, frustration surges. This is an important point for investors, because the performance of investments is always largely reliant on other people’s actions. Few investors buy whole companies, merely small parcels of ownership that confer access to little more than copies of the annual report and the hope that the company, and those that do control it, do the right thing.

Because of this, when things go wrong, it is twice as frustrating. Not only has our goal been thwarted, but there is usually nothing that we can do about it. Such frustration leads naturally to anger.

Consequences of anger

In investing, where effective decision-making is paramount, anger can have dire consequences. Anger impedes investors in two ways. First, it muddies our thinking. Anger leads naturally to thoughts of revenge. But revenge is the wrong goal. Investment is like golf, not boxing. The aim is to do our best, not beat someone else.

Worse still, anger hinders learning. When we blame the market, or hopeless regulators, or self-interested chief executives, we believe that we ourselves are blameless. Harsh as it sounds, most Opes Prime clients did not read (or understand) the contract they signed. We have all done that at some stage. But we need to learn from it. The trouble is, if we stay angry, we ignore our own mistakes. This makes learning unlikely.

Let me share my own experience of frustration-induced anger last year. Timbercorp’s price had plummeted. I dutifully downloaded various reports and articles and “researched” the company. Ultimately, I made a small investment, just in time for a trading halt to be called. When the halt lifted, the company announced an institutional placement at a huge discount to market, with the predictable effect on the market price.

Understandably, I was unimpressed by the board “giving away” their company so cheaply. For an hour or so, I was furious. But I knew enough to realise I had a choice. I could blame the company, or I could examine my own actions. In choosing the latter, I realised that I had invested too quickly. I had not watched the company for long enough and didn’t know its management. I had thought myself a contrarian, and stopped thinking like a capitalist. The mistake was mine and I have not since repeated it. But I could only reach this point by accepting personal responsibility for what went wrong. Had I stayed angry and continued to blame the company, one of two things would have happened. I would have either made another equally rushed investment, or, reasoning that no one could be trusted, I would have stopped investing altogether. Neither strategy will make me much money.

Defusing anger

Herein lies the key to eliminating anger. Angry people become obsessed with “them”: the board, the government, the lawyers, the regulators. The problem is, we can’t control any of “them”. To reduce anger and regain control we need instead to concentrate on “I”. We need to ask: what did I do wrong and what can I do about it now? When we do that, anger dissipates and our thinking clears. In turn, we allow ourselves to learn from the experience, which ultimately makes us better investors.

Adrian McMaster is a registered psychologist and financial planner at McMasters.