I'm OK – You're OK

According to Wikipedia: I'm OK – You're OK    is a 1969 self-help book by Thomas Anthony Harris. It is a practical guide to transactional analysis as a method for solving problems in life.

The book made the New York Times Best Seller list in 1972 and remained there for almost two years. It is estimated by the publisher to have sold over 15 million copies to date and to have been translated into over a dozen languages. 

Base on the principle of Transactional Analysis that we are all born 'OK' -- in other words good and worthy. Frank Ernst developed these into the OK matrix, (also known as the 'OK Corral' after the famous 1881 Tombstone shootout between the Earps and the Clantons). These are also known as 'life positions'. You You're OK You're not OK I  I'm OK I'm not OK Get on with others   Get rid of them   Get away from them   Get nowhere   I'm not OK - You're OK When I think I'm not OK but you are OK, then I am putting myself in an inferior position with respect to you. This position may come from being belittled as a child, perhaps from dominant parents or maybe careless teachers or bullying peers. People in this position has a particularly low self-esteem and will put others before them. They may thus have a strong 'Please Others' driver. I'm OK - You're not OK People in this position feel themselves superior in some way to others, who are seen as inferior and not OK. As a result, they may be contemptuous and quick to anger. Their talk about others will be smug and supercilious, contrasting their own relative perfection with the limitation of others. This position is a trap into which many managers, parents and others in authority fall, assuming that their given position makes them better and, by implication, others are not OK. These people may also have a strong 'Be Perfect' driver and their personal strivings makes others seem less perfect. I'm OK - You're OK When I consider myself OK and also frame others as OK, then there is no position for me or you to be inferior or superior. This is, in many ways, the ideal position. Here, the person is comfortable with other people and with themself. They are confident, happy and get on with other people even when there are points of disagreement. I'm not OK - You're not OK This is a relatively rare position but perhaps occurs where people unsuccessfully try to project their bad objects onto others. As a result, they remain feeling bad whilst also perceive others as bad. This position could also be a result of relationships with dominant others where the other people are viewed with a sense of betrayal and retribution. This may later get generalized from the bullies to all other people. So what?

Well, what does this to do with investment and my subsequent blog post? ummm… in fact NO ! I just wanted to borrow and use the title of one of the quadrant “ I’m not OK, You are not OK “.    :P

In the stock market, we are all in a situation where “ I’m not ok, you are not ok “ which means that most of us can’t really beat the market,, then who is OK?   

Maybe this book shall give us some clues “ Where Are the Customers' Yachts ?”

This is the book written by Fred Schwed 76 years ago and the title came from a story about a visitor in New York more than a century ago. After admiring yachts Wall Street bought with money earned giving financial advice to customers, he wondered where the customers' yachts were. Of course, there were none. 

There is far more money in providing financial advice than there is in receiving financial advice. Ultimately, the broker, banker and financial adviser get richer with tones of commission and fees they earned from customers.

Schwed devotes a full chapter to investment trusts, one of the forerunners of today’s mutual funds. Concerning the question of whether investors can benefit from the professional management of these trusts, Schwed highlighted the following in chapter IV:

“ The basic idea of investment trust (today’s mutual fund ) is little short of perfect, but as we all know too well, in actual practice American Investment trust have varied between the disappointing and the catastrophic. The whole subject makes an interesting study of the generous gap between theoretic promise and practical fulfilment…..

If the basic investment-trust the idea is even half as sound as it appears to be, the average investor has virtually no excuse for buying any securities but investment-trust share. The question maybe put this way, using golf again: if it was very important to you to win the class B championship at your country club and the rules permitted you to hire Gene Sarazen (equivalent to today’s Tiger Wood ), at a reasonable fee, to make the shots for you, wouldn’t you be an egotistical fool to insist on playing the shots yourself?

This would be an airtight analogy, except for one thing. Mr Sarazen is superior to you and me at playing golf, and he can demonstrate this superiority every time he steps onto the first tee. But thus far in our history, there has been little evidence that there exists a demonstrable skill in managing security portfolios. “

Even after 76 years of publishing this book, the result remains the same that active mutual fund still not be able to out-perform the market.

A famous blogger from the USA gave a very good summary of this book :

Link: http://awealthofcommonsense.com/2015/02/10-great-lines-customers-yachts/

One of the quote :

On the emotions of losing money: “Like all of life’s rich emotional experiences, the full flavour of losing important money cannot be conveyed by literature. You cannot convey to an inexperienced girl what it is truly like to be a wife and mother. There are certain things that cannot be adequately explained to a virgin by words or pictures.”

Investors’ return vs Investment return

image credit to nytimes.com

Every year Dalbar releases their annual “Quantitative Analysis of Investor Behavior” study which continues to show just how poorly investors perform relative to market benchmarks over time. 

More importantly, they discuss many of the reasons for that underperformance which are all directly attributable to our brain. 

According to Balibar's research, average 20 years annualized return for retail investors was just merely 2.5% vs S&P 500 of 9.9%.

The key to successful investing is not investment performance but investor performance.  Many of us believe that our goal as investors is to search for the investment that is better than average.  But it turns out that searching for this so-called best investment leads to behaviour that ends up costing us money.

image credit to realinvestmentadvice.com

image credit to realinvestmentadvice.com

This chart shown us the net equity inflows during crisis time and it also illustrates how irrational investor’s behaviour of “ sell low buy high “.

<Image credit to streettalkuive.com via Investing.com>

The Behavior Gap

Behavioural economist try to explain this in so-called " Behavior Gap ", it means that as investors we end up doing worse than the average investment – mostly due to our poor behaviour.  This behaviour gap is the difference between the average investment return and the average investor return, or the distance between what we should do and what we actually do.

As Carl Richards explains in his book, The Behavior Gap:

“It’s not that we’re dumb. We’re wired to avoid pain and pursue pleasure and security.  It feels right to sell when everyone around us is scared and buy when everyone feels great. It may feel right – but it’s not rational.” 

Richards says he grew tired of watching people he cared about make the same mistakes over and over with their money all because they let emotion get in the way of making smart financial decisions.

Understanding this behaviour gap – and your own behavioural tendencies – is crucial to achieving better investment returns.  Accept the fact that no one can accurately predict what the stock market is going to do and that very few investors can consistently pick better than average investments.

Even though we all make mistakes we need to review them and identify our personal behaviour gaps in order to avoid them in the future.

Focus on what we can control, such as building a more realistic investment goal and expected returns, ignoring the “noise “ from the market e.g China’s economic performance, BREXIT impact, FED rate movement, etc , would improve our overall performance.

Ben Graham, the father of value investing, once warned, “Individuals who cannot master their emotions are ill-suited to profit from the investment process.” 

Why are investors sometimes their own worst enemy! 

This great book explaining the insight of 50 groundbreaking psychological experience which may make us avoiding the many psychological mistake made by many investors.

You may find most of the psychological behavioural which have a great impact on our decision making on investment, such as “ Confirmation bias, The Availability Heuristic, Loss aversion, House-money effect, Endowment Effect, Sunk cost Fallacy, Hedonic Framing etc.. with detail explanation.