James O'Shaughnessy: Mastering Emotions with Data

James O’Shaughnessy is one of the few active equity managers we vibe with at our shop because his firm and its strategies are data-driven as opposed to from the gut or emotional.  There are no chats with company management during the stock selection process, no guessing games in terms of asset allocation – just numbers.  This approach, of course, doesn’t guarantee profits by any means – but it is a repeatable one and it certainly helps avoid the everyday human folly that can so easily derail just about all of us.

James had a post over at my WSJ home-away-from-home blog Financial Adviser this week that offered advice to advisors about keeping client emotions in check, especially in a market crisis…

Historical data can be useful during crises for putting asset losses into context. For example, I recently researched the 50 worst 10-year declines in the U.S. stock market, and then how equities performed following these tumultuous times in the market. I found that during the three, five, and ten-year periods after a market crash the numbers always balanced themselves out with all enjoying positive returns―and again, that’s the worst case scenario. When things got really ugly and bad, the math side started to work. This type of data is very reassuring for clients. It provides proof that things are likely to get better, and this kind of context helps prevent rash decisions.

Throwing money at raging bull market and selling everything when things look their bleakest is one of the most common mistakes investors make in every cycle.  Keeping the historical facts in mind helps to limit the panic/euphoria tennis match, even though we can’t eradicate our tendencies to be emotional altogether.


Voices: James O’Shaughnessy, On Emotions (WSJFA)




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