'Hot bath' syndrome

18 Jul 2014 - by James Paynter

What does a nice, hot,
deep bath have to do with
investing or trading in any
financial market, whether
the rand, other currencies,
gold, commodities, bonds,
stocks etc?
More than you may
think.
You see, when it comes
to investing, trading or
exchanging in a financial
market, the average person
acts as if they are about to
take a nice hot, relaxing
bath on a
winter's
evening.
Imagine
the scene...
The bath
has just
started to
run. There is
no incentive
whatever
to get in,
so you wait
(dressed) on the side as it
fills up.
You test the water, but
mostly it is too hot for your
liking – or too cold. And so
you adjust the taps.
When the bath is nearing
that nice, inviting, full look,
you do some last testing
and adjustments and –
finally – you get in.
And immediately you feel
so good as you simply lie
back and soak in that rising
warmth all around you.
And then something feels
different – the water isn't
that warm anymore.
So you fill
it up some
with some
more hot
water.
But it
doesn't stay
that way...
It starts
cooling
down.
So you sink
down up to
your neck in
the water – trying to soak
up that last bit of warmth.
And still it cools down….
…And still you don't get
out.
No, instead, you pull out
the plug, and stay in the
bath as the water drains
away around you. And,
strangely, you almost enjoy
the different sensation after
that nice hot bath, which
is still very much in your
mind’s eye.
Until suddenly, when the
bath is almost drained of
water, you wake up to the
fact that you are sitting –
totally exposed and cold –
in a completely empty bath.
And that's when you
finally get out.
I am sure you can relate.
Why on earth do we do
this? Why get in the bath
when it is full and hot? And
get out when it is cold and
empty?
Why not get in while it is
hot and filling up? And get
out before it starts cooling
down?
Well, here's the rub – as
irrational as this human
behaviour may seem,
our natural instinct is to
approach the financial
markets in exactly the
same way – buying when
we should be selling, and
selling when we should be
buying.
So, what is the cure/
antidote to this syndrome?
· Firstly, we need to
realise that we will
default to this mode
of emotional behaviour
unless we have an
objective, informed,
educated knowledge and
view of the market.
· Secondly, we need to
know ourselves and
recognise when those two
villains, fear and greed,
raise their heads, and to
take action based on our
analysis, despite how we
are feeling.
· And thirdly, to realise
that when everyone is
agreed on where a market
is going, it is a clear
indicator that it is likely
to do just the opposite.
As Warren Buffet aptly
put it, “Be fearful when
others are greedy and greedy
when others are fearful.”
For more examples of
this phenomenon in the
property, gold and stock
markets, visit http://www.
forexforecasts.co.za/go/
market-sentiment.