The masochistic stock market investor

Regularly checking stock market quotes is a form of masochism for the long-term stock market investor, as the author Nassim Nicholas Taleb so aptly explained in his book Fooled by Randomness  (To be fooled by chance). In his book, he gives the striking example of the investor who sees his annual return exceed by 15% the return of secure fixed-rate investments, with an error rate of 10% per year. This error rate corresponds to the annual volatility of his stock portfolio. According to the author, and based on the laws of statistics, this means that there is a probability of 93%, for this investor, of making money in any year. This is therefore an extremely optimistic scenario or, in other words, an excellent investor, in fact.

If I tell you that you have a 93% chance of making money in the stock market each year, you'll tend to answer: "Wow! I'm going for it."

However, what the same data means, when you calculate it on a per-minute basis, is that your chances of making money in the stock market increase to exactly 50.17%. It's almost the same if you calculate it on a per-second basis, when your chances of making money are in the order of 50.02%.

Conclusion: if this investor looks at his portfolio in real time, he will experience a negative shock every other time and will surely have this response: Shit, my wallet is going down!

In fact, according to Taleb, if the investor looks at his portfolio every minute, 8 hours a day, he will experience exactly 240.8 pleasant minutes (where he makes money) and 239.2 unpleasant minutes (where he loses money).

Keep in mind that this is a successful investor, whose returns exceed those of secure fixed-rate investments by 15%, and that despite this, he is confronted 1 time out of 2 with an unpleasant experience when consulting stock market quotes. In reality, it is more than that because the happiness associated with seeing his portfolio appreciate is not inversely proportional to the unhappiness felt when his portfolio depreciates.

According to the findings in neuroeconomics of Dr. Richard L. Peterson, humans feel more pain when faced with a loss than pleasure when faced with a gain, even if both are of the same level. According to Dr. Peterson, a loss has twice the impact on a stock market investor than a gain.

Our gifted investor, illustrated in our example, therefore systematically ruins his life, this is a fine example of masochism, in my opinion.

Do you now understand why the more you consult stock market quotes, the greater your chances are of one day coming to deeply hate the stock market?

Martin Raymond, for the blog investiter-a-la-bourse.com