Stanley H. Teitelbaum, PhD is a clinical psychologist and psychoanalyst. His new book is SMART MONEY: A Psychologist's Guide To Overcoming Self-Defeating Patterns In Stock Market Investing. The book addresses how to identify and overcome emotional roadblocks, blind spots, and errors in judgment that interfere with profitable investing, and how to develop greater trust in one’s ability to navigate investments.
In this episode we discuss the emotions that investors are feeling in this period of market turmoil. Bear markets are not very unusual. Since 1926, there's been 15 episodes of at least 20% declines, meaning that there's been at least 15 bear markets in that period of time. What's important to remember is that on average, the average total loss from the peak in every bear market has been almost 35%. We are now down around 24%, according to the Dow Jones Industrial Average. That means we're still significantly short of the average, which means there's a room for one or more additional down legs. And that's scary.
“Don't be arrogant. Be able to recognize that there's so much you don't know and Mr. Market, in a way, has a mind of his own. And he will throw his curveballs whenever he wants to throw us curve balls. And we're not necessarily prepared for that. So be prepared for the uncertainty and be humble about what you don't know. Be able to say, ‘there's so much that I don't know, and that that's okay, that's part of being an investor.’ And if my investments go according to that 9.6% average over time, I'm going to be in good shape. But be humble. Don't think of yourself as knowing more than you actually do know.”
TRANSCRIPT FOLLOWS AFTER THIS BRIEF MESSAGE
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Hi and welcome back to Stocks for Beginners. I'm Phil Muscatello. There's a long-standing axiom: let your profits run and cut your losses early, designed to guide investors toward a successful trading strategy. But where are we at the moment where many of our stock picks are underwater? Hello, Stanley.
Hello, Phil. Good to see you again. Thank you for having me.
Yeah. Good to see you again. Stanley was a guest on the podcast in March and his psychological insights resonated strongly with me. I felt almost like I was on the couch. Dr. Stanley Teitelbaum is a clinical psychologist and psychoanalyst who for more than 35 years has helped clients examine and overcome their emotional problems and in interpersonal conflicts. His latest book is "Smart Money: A Psychologist's Guide to Overcoming Self-Defeating Patterns in Stock Market Investing". So we're looking at a, quite a significant downturn in the markets at the moment, since we last spoke, what are the emotions that investors are feeling at the moment?
Stanley (1m 33s):
I think it's a really scary time for most investors. And I know we spoke back in March and since then, it's been an accelerating decline with some intersperse good days, like today happens to be a very strong day. But it's important not to be fooled by that because the trend is definitely downward. And just as a matter of fact, April, I think we talked to March. April was like the worst April for the stock market since 1940. That's like 82 years. This was the worst April since 1940 and May was even worse and June, until now, is also worse.
Stanley (2m 16s):
So we're in a significant decline. And I think for the most part, people are feeling scared, maybe bordering on terror. They don't know what to do. They don't know who to turn to. They don't know what kind of advice to get. And oftentimes the advice that they do get is not necessarily the best advice. So people who are in it are in a tough spot. And it depends very much on what their financial situation is, whether they've taken any taken any losses thus far, or whether they've decided to stay in for the long haul. All of this is very dependent on each person's profile and risk appetite.
Phil (3m 1s):
So what do you think is the worst reaction at the moment and what should listeners guard against in terms of not losing too much of their capital?
Stanley (3m 10s):
Well, they've already lost a lot of their capital. So, you know, just to give you a couple of quick statistics here, this is important because if we're in a downtrend, as we are, let's call it what it is. It's not just a downtrend, it was a correction. And a correction is defined by a loss of, you know, between 10 and 20%. And then it's no longer a correction. It is a legitimate bear market, which is defined as a drop of at least 20%. So what we need to consider, what we will need to know are some hard and painful facts about bear market, about bear market cycles and bear market history.
Stanley (3m 53s):
So bear markets are not necessarily very unusual. There have been 15 episodes since 1926: that's a very important year because we measure gains and losses, that's the point when more complete records start to be kept on what's happening in, especially in the Dow Jones Industrial Average. And since 1926, there been 15 episodes of at least 20% declines, meaning that they've been at least 15 bear markets in that period of time. Now what's important to elaborate a little more about is that on average, the total loss from the peak in every bear market, the average has been almost 35%, 34.8% has been the average loss at a bear market.
Stanley (4m 48s):
We are now as of yesterday, I think, probably down around 24%, according to the Dow Jones Industrial Average. So that means we're still significantly short of the average, which means there's a room for one or more additional down legs. So that's scary. That's very scary. It's not like we're not scared enough already, but the scary may become even more like terror. The second point worth mentioning, and people don't want to know this. They want to hear this, but the painful truth, again, talking about averages, the painful truth is that the average duration of the decline until a bottom has been reached from the top to the bottom.
Stanley (5m 35s):
The average duration of a decline until the bottom is 264 days. That's like, what is that? Two thirds, three quarters of a year. So that doesn't just change very quickly. And the time required to recoup the losses after a bottom has been reached. And we don't know yet where the bottom is, is something like 567 days. That's like a year and a half, year and three quarters before the losses that have been incurred in the bear market can be regained. You know, I always say to people, and I say to you, this is all about probability.
Stanley (6m 16s):
You know, investing in the stock market is always about probability. If you're trying to become more successful, you want to follow certain guidelines, certain principles, which will give you kind of a heads up on the probability of doing better than if you didn't have any of those guidelines or principles. So it doesn't always happen according to the probabilities, but it's useful to have those probabilities in mind and to follow them so that you have a pretty clear guide. So to answer your question again, what are people feeling now for the most part, they're feeling scared. And if we have, and we've down only 24% into this bear market, if there's another leg down, then what happens after scared?
Stanley (7m 4s):
I think at some point scared becomes terror. And at some point it seems to affect people who sleep over this. People are losing a lot of money. People are lost in what to do. Most people or many people have a deer in the headlights kind of reaction to it because they get frozen. They feel the air down so much already. So maybe it's too late to start to sell, but if they stay in probabilities that they can lose even more. So it's a lot of, a lot of scary stuff out there right now.
Phil (7m 38s):
And we should date stamp this, we're talking on the 21st of June, 2022. And just so that listeners know exactly where we are in the cycle, as we speak and off air, I was just mentioning that I was speaking the last time we had a major downturn, which was back in March, 2020, and a great investor that I know. And I was experiencing the terrors myself at the time. And I said, how are you feeling? And he just said, situation normal going to go and play some golf again. I think though, this is the point because we're going to come to this in the questions that you have to have a process in place. And the process basically protect you from too much of a downside.
Phil (8m 18s):
And this investor has a process in place. So when markets hit certain key points, he just sells and basically he's out of the market. And then he's got another indicator which tells him the time to start getting back into the market. But many investors at this stage don't have this process in place. So is it better for them just to wait things out right now?
Stanley (8m 40s):
No, I, you know, I always think knowledge is power. It's useful to have knowledge. Friends are asking me people that I play golf with people that I've played tennis with. And they know that I'm into this area and I've written the book smart money. And they say, well, money doesn't seem very smart right now. What should I be doing? I said, well, what are you doing more than not the people I'm talking to, the people that are approaching me on this. I say, you know what? I'm not even looking. I'm not even looking. I used to look at CNBC every day or several times. I don't even want to look now, I'm not looking at my portfolio. I used to check my portfolio regularly.
Stanley (9m 21s):
They say, I'm not even checking my portfolio right now. I don't want to know. I don't want to look now in a way that's useful to the extent that it chills them for feeling too much anxiety, because to look what to see and to know, and to watch the down drift and the down drift go further and further during a bear market, it could be overwhelming and terrifying. So in a way, it protects them from not having to feel too much of anxiety. On the other hand, it's useful in a sense, to be able to identify your anxiety, to be able to say to yourself, yes, I am very anxious right now.
Stanley (10m 5s):
And the reason I'm anxious right now is because I'm losing a substantial chunk of my assets. And that's a good reason to feel anxious. But the knowledge is to be able to tell yourself that there is a cycle that is a bear market cycle. And it's like, there's a pendulum between the bull market and the bear market and the pendulum. And I think maybe we touched on this once before that since 1926, the average gain in the stock market has been 9.6%. That's almost 10% now. That's pretty good. That's pretty nice. However, in any given year, it's quite unusual that there is a gain or loss between nine and 11%.
Stanley (10m 53s):
That's somewhat rare and unusual. So the average over almost a hundred years is almost 10%, but in any one given year, it's rare, it's seldom that it's 9% or 10% or up to 11%. So what does that mean? What that tells us is that the market tends to overshoot and overshoot the average. If the average is 9.6%, but it's not happening in any given year. Like last year. I think the Dow was up something like 28%. So that was a significant overshoot of the average right now. So four in 2022, we're down 24%, according to the Dow.
Stanley (11m 37s):
So that's a significant undershoot. So over time, there's usually what we call a reversion to the mean, meaning it comes back to where quote, it should be somewhere in the 9.6, 10% range, but that's not now it may not happen for awhile. And if we're in a bear market, but according to the statistics that I gave you a moment ago, that's going to take some time. But to know that it's a cycle is kind of in some way, calming to know that you're not going to go to zero. And in any 20 year period in the history of the softball can any 20 year period, there's never been a time, not even once where during the course of 20 years that the Dow Jones Industrial Average has shown a loss for 20 years.
Stanley (12m 29s):
So in a way that's comforting to at least tell yourself we're in the cycle and there is a cycle. And right now we're in the teeth of the bear and we may get even more so, but that will over time, play out and change and get back. And at some point as happened in the last 10 or 11 years, that we were in a colossal bull market where the average is overshooting every year. And it was a great time. It was a happy time. I used to sing that old song from the depression happy days are here again,
Phil (13m 6s):
Stanley (13m 8s):
Happy days. So that was great, but that was then, and this is now. So they will be this overshoot and there will be this undershoot and that's, what's happening. That's what's happening right now
Phil (13m 22s):
In terms of your own personal process. And we'll get to that. What that personal process is, you believe that if you limit your losses and take your gains, when they arrive that this process will get you through any kind of market, how are you finding that personally for yourself at the moment? Are you in or out?
Stanley (13m 47s):
Well, it's really rather mixed. And I would like to be able to say that I'm really well-protected, but the truth is that I've lost a lot. And the reason that I've lost a lot is because whatever I haven't sold has continued to go down along with everything else. You know, there's what I call a G factor, meaning a general factor that whatever's happening in the general market affects most all of the stocks in the same direction. So I try to have a rule for myself. Let me preface it by saying my mantra. One of my major mantras is cut your losses, cut your losses, cut your losses.
Stanley (14m 30s):
You know, in the real estate it's location, location, location, when it comes to the stock market, I believe in cut your losses, cut your losses, cut your losses. Now I try to have a limit that I'm willing to take a willing or look completely willing to take a loss of like somewhere between 10 and 20%, no more than 20% if I had a gain or if I bought a stock. And then somehow I had now have a loss of 20%. Very often. I'm out more recently since the last few months, I would say it's been less than 20%. It's been more like 10%.
Stanley (15m 10s):
So I see a loss of 10% and I get up. So the reason I'm telling you that is that although I have suffered significant losses, what also comforts me is that I've had a number of investments that I made, that I sold at the 10% level of loss, or slightly more than 10%. And I'm out of those. And those have continued to decline more and more and more so, whatever my losses are, they would be that much greater. If I had not followed that principle, that is very meaningful to me, cut your losses, cut your losses, cut your losses.
Stanley (15m 51s):
And the reason for that is because it's very usual, not only in a bear market, but in any stock investment you make that turns out to be bad investment. You think you're making a good investment and maybe for all kinds of reasons that happened or that you weren't aware of when you made the decision to buy things have gone south instead of north. And to be able to say to yourself, I made a mistake. I made a mistake and instead of holding and holding and holding and we can handle, that's one of the things you want to talk more about later, and I'd be happy to do that, to be able to admit to yourself that I was wrong, that I made a mistake and I need to be able to have a principle.
Stanley (16m 39s):
And the principle is what is the comfort zone? What is the level? It goes to risk appetite. And one question, every investor should ask himself before they invest in anything is how much can I afford to lose? How much can I afford to lose? And some so-called experts on the stock market say, you know, it's even less about winning. It's more about protecting your losses. How much can you afford to lose before you losing too much? And very often there were servers that ask people, how much do you think you could afford to lose in the stock market?
Stanley (17m 21s):
And very often people underestimate underestimate. So, you know, the more optimistic to think about how much they can lose, but when it really happens, you know, when the S hits the fan, they're in much deeper trouble than they profess the bait back to the cycle for a moment, the cycle. And this is why it's important to recognize you're feeling anxious, but the cycle will tell you that in a bear market, there is terrible fear dread. And then when we run through the cycle from bear to bull, it goes from dread. The next phase is relief.
Stanley (18m 2s):
And then there's a use of hope. And then there's a phase of excitement and exuberance when things thought to turn in a better direction. And then ultimately in the context of a bear market, there's euphoria. So that's kind of the whole cycle. So when we're in the extreme part of the cycle right now, which is fear and dread, all of them, just not looking at my portfolio, it's helpful to know I'm in the midst of that part of the cycle. That is the worst part, and that it will change and the sun will come out again at some point.
Phil (18m 45s):
And that's the most difficult part. Psychologically is managing these emotions. And some people like yourself use gold for tennis to help with this. You know, I'll go to the beach and go for a swim or so forth, but it's really important to have some techniques in place to help you, not so much manage your emotions because you know, emotions can't be managed, but at least to help you deal with these emotions, do you feel that's the case? It's important to have some, some way of dealing with these emotions.
Stanley (19m 12s):
Yes. And also another reason why I think it is important is because it gives you a sense of control. You know, you could say things are terrible right now and own up to the fact that I'm really feeling scared, dread or terror, but I'm not going to sell. I'm not going to sell my positions right now. They've gone down so much already. I am afraid to sell now. And there were all kinds of reasons why people back away from that. But when you look at that, at least you have some control, meaning that you're making a decision. If you're making a decision, I'm not going to sell. I'm just going to hold an a and that's probably the majority of people right now is what they're doing.
Stanley (19m 55s):
They've making a decision. And when you're making a decision, it at least gives you some sense of control over your portfolio, rather than feeling totally at the mercy of the whims of what may be happening. I think that's a useful thing to know.
Phil (20m 12s):
I think it's quite heartening as well, because I hear from a lot of younger investors that have had a lot of their education online over the last few years, and they understand the long-term nature of investing. They understand dollar cost averaging, and they've already been a newer to this, right? From an early age. Whereas many older investors have sort of come in going, okay, the stock, market's a great game where you can make some quick buck.
Stanley (20m 36s):
Well, you know, there's a counter argument to what you just said.
Phil (20m 40s):
Good. I love a counter argument.
Stanley (20m 42s):
And what you said is very pertinent, but the counter auger, it would be that most older investors, certainly investors who have been around, let's say in the last 10 or 15 years, they've never seen a bear market. Maybe even know what a bear market is. So they're accustomed to thinking, well, this trend is going to be up. And maybe there'll be a little correction as there was in 2018. And there was one day. Yeah, I think it was in February, 2018 that the Dow went down 1,175 points in one single day. That was pretty frightening. But by and large, those folks have never been through a significant bear market, the younger people, or the newer people in a way it's good for them to see this now because they will now be more fortified to know that there is such a thing as a bear market.
Stanley (21m 37s):
And hopefully that will be etched up in their memory bank somewhere going forward. So they'll have that to draw upon in contrast to the people that said, I've never seen a bear market, not acquainted with whatsoever. That's the counteroffer
Phil (21m 51s):
And many more have not even seen an interest rate, rising interest rate environment, either
Stanley (21m 56s):
The rising interest rate is certainly having an effect on what's happening. Yeah.
Phil (22m 1s):
So let's talk about the three main takeaways of your book. And there's three points here. The first one being always remained humble. Don't get caught up in the hubris of having picked a winner without having a planned exit point. If the stock does a reversal,
Stanley (22m 17s):
Yes, it's very easy to get caught up in congratulating yourself. If you've had some success. And one example I like to use is like, you know, if let's say last year, your portfolio went up 20%. Some people then are bragging about, well, gee, I'm really good at this. I made some picks and they turn out well. And my portfolio was up 20% last year though, I'm hot stuff. And they may not even realize that the overall market was up 28%. You know? So you weren't as good as the general market. You were good with your 20%, but you didn't even match the 28%.
Stanley (22m 59s):
So don't fool yourself. Don't deceive yourself into thinking that you're this great stock picker, because in a way, what your good fortune was related to the theme that a rising tide lifts all boats, you know, that expression, a rising tide lifts all boats. So most everything went up last year. That's how we got 28%. So if you did your 20, that's great, but the rising tide lifts all boats along with all of the other boats. So be humble, don't feel that you're great. And that you are this terrific stock picker and many so-called expert investors who know what to do.
Stanley (23m 39s):
You know what they're talking about? Use that word that be humble. Don't be arrogant. Be able to recognize that there's so much you don't know and miss the market. I like to use that phrase, Mr. Market in a way has a mind of his own. And he will through his curveballs whenever he wants to throw us curve balls. And we're not, this is a really prepared for that. So be prepared for the uncertainty and be humble about what you don't know, be able to say. There's so much that I don't know, and that that's okay. That's part of being an investor. And if my investments go, according to that 9.6% average over time, I'm going to be in good shape, but be humble.
Stanley (24m 28s):
Don't think of yourself as knowing more than you actually do know.
Phil (24m 31s):
And the second point is you can safeguard your capital by following a disciplined approach. And we discussed this before that you have a predetermined amount that you're going to set as your sell level. And for most people, this would be a 10% would be a comfortable level.
Stanley (24m 45s):
Yes, I know. I try to use that. Not only with selling your losses, but I try to use that sometimes also with selling your gains, meaning that cut your losses, cut your losses, cut your losses. That's my mantra. So if you're able to follow that principle and culture losses say at 10%, and maybe that feels too tight. You may want to extend the boar between 10 and 20%, whatever it is, investor business daily periodical, very good periodical. They say 8%. That's the rule 8%. Now that's very tight because things can go down 8% very quickly. It may not be comfortable for people that said that 8% level.
Stanley (25m 25s):
So I think somewhere between 10 and 20%, depending on your individual circumstances makes more sense on cutting your losses. But I also try to use it on the upside. So for example, if you're fortunate enough to have picked a winner and it's up between 20 and 30%, that might be a good time to sell and luck in your game. Now, if you do that, you may lose out on another leg upward, but in general, I think that's worth it because you've locked in between 20 and 30% and you gain, and you've locked in your losses somewhere between 10 and let's say 15%.
Stanley (26m 6s):
So on balance. You're a winner. You're a winner by not losing too much. And your winner by taking your gains at a reasonable level. I may have mentioned this to you. Last time. One of the most famous hedge fund entrepreneurs is Steven A. Cohen who you may have heard of you probably have for the now he's also the multi-million dollar owner of the New York Mets baseball team, which a team that I love and listen to and watch every day. And they're having a very exciting season, but in his hedge fund, he has had numerous portfolio managers and he assigns to each manager.
Stanley (26m 51s):
You will take care of this. You will take care of that. You will take care of this. And what he found on balance is that if his portfolio managers have success between 55 and 60% of the time, he's very happy and no one does a hundred percent, no one gains a hundred percent, no one has only winners. You have winners and you have losers, and you're hoping you winners are going to be winners, but things don't always work out that way. His portfolio managers who are very well drained, if they have a batting average of 55 to 60% success, he says, that's great. That makes me very happy.
Stanley (27m 32s):
And that's made him very successful.
Phil (27m 34s):
And then the third takeaway is be attuned to the emotional factors and defense mechanisms that may be influencing your thinking judgment and decision-making ability.
Stanley (27m 43s):
Yeah, there were all kinds of emotional factors. And that's why my book is about, you know, my book is called "Smart Money". There were a lot of books called smart money, but my smart money is about the emotional factors. It's about the psychological factors that affect and influence how people make buy and sell decisions and the things that prompt people to trip over themselves to get in their own way in the decisions that they're making. And so I've said there's a cluster of, you know, the foremost common self-defeating patterns. The subtitle of my book is a psychologist guide to overcoming self-defeating patterns and stock market investing and the four most common patterns or buying high and selling low and kind of things are going up and now they're higher.
Stanley (28m 34s):
And then we want to get into it until we buy high. And then it doesn't stay high or we sell low. Like now, if people are selling now, they may be selling closer to what will be the low. The second part is following the herd. If everyone else is buying stock XYZ, I want to do it too. I don't want to be left out of the gravy train. I don't want to be left out of the parties. We call that formal wear FOMO, fear of missing out, afraid that if I don't come in, like everyone else I know is coming in on stock X, Y, or Z, I will be left in the dust. I will be left behind. So that's the second factor.
Stanley (29m 14s):
The third helmets of the feeding pattern is looking for the guru, looking for the next guru, the so-called expert that I'm going to connect with or affiliated with maybe a financial advisor or someone else that I put on that pedestal.
Phil (29m 30s):
Some newsletter that you've signed up for or
Stanley (29m 32s):
So looking for the next guru. And very often gurus have clade feed. So it doesn't always work out that way. And then the fourth pattern that is also self-defeating is very often staying too long with their own productive financial advisor. I did a search recently about how many people actually use financial advisors. I was surprised to see the resolve, which was that in the, in the US. And I get a lot of different studies, but there was like a 2019 survey done by CNBC that said only like only 1% of the US population were using financial advisors.
Stanley (30m 12s):
That seemed to be to me to be vasly understated. But, but I did look at some other studies that showed maybe 38% of people are using financial advisors. That's still very low, which means that more and more people are feeling they can do it war on their own, or they're afraid to use financial advisors. Why are they afraid? I think they were afraid of the costs and guard and they were afraid about whether they can trust and they trust a financial advisor. And there are so many issues now that everyone is dealing with, who can I trust? Can I trust the government? Can I trust this?
Stanley (30m 52s):
Can I trust the financial advisor that come, that come into play? And I think the good news on that is hopefully some people are learning better how to trust themselves as well as a financial advisor. If they feel that's the way they need to go.
Phil (31m 8s):
Fantastic Stanley. Well, it's been great catching up with you again. And like I said, I want to highly recommend your book. Give us a title again, the full title,
Stanley (31m 16s):
Smart Money: A Psychologist's Guide to Overcoming Self-Defeating Patterns in Stock Market Investing
Phil (31m 25s):
Okay. And we'll put links in the episode notes and the blog posts. Then again, like I said, highly recommended Stanley. It's been great having you back on again. Thank you very much.
Stanley (31m 35s):
My pleasure. Thank you for having me have a good day.
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