Behavioral Investing Specimen No. 864: The Barber

Mr. Flynn has been through two booms and busts in the 13 years since his investing travails were first chronicled in The Wall Street Journal. In those days, Bill’s Barber Shop was a hub of stock-market fever. Mr. Flynn…was hot on technology stocks, with a special passion for data-storage company EMC Corp.

There’s a really sad Wall Street Journal article this weekend that follows up with a group of regular guys who were profiled 13 years ago, hanging around a Massachusetts barber shop, picking highflying internet stocks.  They mostly got blown to smithereens in the tech crash then and while some of them learned a lesson, the barber himself has had a rough life ever since. Instead of enjoying a growing portfolio in his retirement, 73-year-old barber Mr. Flynn has been watching the recent new highs in the markets without any ability to participate or benefit.

I point out the article not to make light of anyone’s mistakes – believe me I’ve made my share – but to pull out a few key phrases describing exactly the kind of thinking and behavior that we as investors should avoid.

Here are a few examples from Jonathan Cheng’s story at WSJ:

1.Mr. Flynn would cut hair while he and his regulars—including local Maytag dealer Rick Capobianco; Ron Danforth, owner of a direct-mail business; and gas-station proprietor Rick Smithson—traded news on highflying stocks and mentally tallied their winnings.”

Two problems here – first, if you’re going to be a speculator it has to be your full-time endeavor. Hobbyists simply can’t do it. Also, while there’s nothing wrong with talking investing with friends, this kind of regular routine reeks of Confirmation Bias, one of the 12 cognitive biases that crush our portfolios.

2. “many households…remain so demoralized by the busts of 2000 and 2008 that they have missed the latest boom entirely.”

If you’re only in the market when its exciting, you are essentially buying a series of tops. You are basically having your heart stepped on each time you come back until there’s nothing left. Regular readers know I abhor “all-in” or “all-out” behavior.

3. “Mr. Flynn claimed to have put 100 friends into EMC stock in 2000, including Mr. Capobianco. After Mr. Flynn’s appearance in the Journal in March 2000, EMC invited the barber to a shareholder’s meeting to meet company executives. Mr. Flynn later wore a jacket emblazoned with the EMC logo around town.”

This is why, as Cameron Crowe’s screenplay for Almost Famous puts it, you can’t make friends with the band. You can’t fall in love with stocks and the more time you spend researching a single company, the more you feel obligated to stick with it – they call this the “sunk cost dilemma” but I call it Stockholm Syndrome.

4. “The barber held EMC stock to a peak of about $130 a share, only to ride it back down to less than $4. His fortune began with $150,000, swelled to $834,000 in September 2000, and then shrank back to about where it started.”

No risk management, absurd position sizing, lack of diversification, greed at the top, etc. Basically everything you can do wrong on an investment or trade all in one.

5. “Mr. Flynn took a breather from trading before getting back into the market in 2007. He put some money in Eastman Kodak Co. at the urging of a stock broker. The camera-maker filed for bankruptcy last year, wiping out the barber’s $28,000 investment.”

Operative phrase: “at the urging of a stock broker”. My god, a stock broker? What year is this?

***

Anyway, I feel terribly for the barber but I hope his example helps others who come across the story. Most of these mistakes are easy to avoid once you become aware of them – the problem is that this just isn’t taught anywhere formally, most investors have to seek this knowledge out or learn it the hard way.

Source:

A Barber Misses Market’s New Buzz (WSJ)

Read Also:

The Muppets are Pissed (TRB)

 

 

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