by Rob Bennett

Rules were adopted some time back requiring the companies that sell food products to report on the package how many calories are taken in by eating a serving. Lots of us are overweight. The theory is that if we are better informed as to how many calories we are consuming, we will be better able to maintain our proper weight.

It’s not working.

I know from examination of my own behavior how easy it is to play games with the numbers. You look at the calorie counts on the things you eat that are healthy but ignore them for the things you eat that cause you to consume lots of empty calories, justifying this strange practice on grounds that it’s not necessary to count everything (that is indeed necessary if you want an accurate count, of course). Or you pour out the amount of cereal specified as a single serving but then fail to double your mental calorie count after adding the same amount again to your bowl on completion of the first bowl. Or you put on more salad dressing than permitted by the rules that were used to develop the calorie count.

The people who were already watching their weight before these rules were adopted enjoy looking at the numbers and no doubt do indeed pick up helpful information by reading them. But the people who most need to watch their weight either ignore the numbers or rationalize away the message they deliver. Man is the rationalizing animal. Numbers don’t stop us from wanting what we want and no calorie count every stood in the way of a fat man (the dig here is aimed at myself) and his cookie.

The same sort of thing goes on in the investing realm. All of the numbers we need to invest in a highly effective manner are available to us today on the internet. But how many middle-class investors even know what P/E10 stands for, much less use it to adjust their stock allocations in response to big price swings? We want to believe that stocks remain a good deal even when they are insanely overpriced and we are not about to let 30 years of academic research showing us otherwise stand in our way.

The move in recent decades to research-based investment strategies has made investing decisions more emotional. Lots of us were going with Get Rich Quick choices in the days when we were going with our gut. But now we are going with Get RIch Quick choices that we tell ourselves are backed by the numbers. The phony numbers encourage us to stick with dangerous choices longer than we would if we were not able to kid ourselves into believing that the choices are rooted in science.

Hope lies not in lecturing people to pay attention to the numbers. That doesn’t work when trying to persuade people to eat better and it won’t work when trying to persuade people to invest better either. Emotions trump numbers every time.

What I think might work is developing tools that help make the benefits of following realistic investing strategies tangible.

The great thing about trying to teach people to invest effectively is that you don’t need to ask them to give up anything. To lose weight, you really do need to cut back on the chocolate-chip cookies. To become an effective investor, you need to stop pretending that bull market gains are real. But even Buy-and-Holders do not actually spend the phony baloney gains. They obtain an emotional buzz from pretending for a time that they are richer than they are and they of course would need to give that up to become more effective investors. But all that’s needed is that they become willing to entertain more realistic ideas, not that they give up any good or experience.

Stocks were priced at three times fair value at the top of the bull. Millions of people hurt themselves in very serious ways by pretending that the bull market gains represented something of lasting, real value. What if the investment experts made a point of telling them otherwise? What if each day’s report of the new Dow Jones figure or the new S&P 500 figure included a valuations adjustment letting people know the true value of their portfolios?

Some think that could never happen. They note that it has never been done before. But why is it so impossible to imagine our society making a change for the better in this regard? The primary reason why most experts don’t tell people the realities is that it would put them at a competitive disadvantage to do so. All humans like to hear fairy tales, especially about how much money they possess, and the expert that encourages the fairy tale is always going to win more business than the expert who talks straight.

What if we all worked together to insure that we all talk straight? There aren’t too many people today who argue in favor of air or water pollution. There aren’t too many who argue that racial discrimination is a good thing. There are disputes about how to reduce the Federal budget deficit but it is a rare politician who says that the deficit is not a problem that needs to be addressed. What if we reached a consensus that the Buy-and-Hold Crisis has caused such human misery that we need to work together to insure that Get Rich Quick thinking never again gets so out of hand?

Today there is a Social Taboo that protects Buy-and-Hold from criticism. What if we reversed things so that the Social Taboo discouraged Get Rich Quick investing strategies? Is that really so far-fetched an idea?

Emotions trump numbers. There’s no getting around it. But it may be that as a society we are in the process of developing an emotional distaste for bull markets and the financial damage and social upheaval they bring on. If we develop an emotional distaste for bull markets, we can for the first time put the great persuasive power of numbers to positive use for investors.

Rob Bennett argues that it is the widespread promotion of Buy-and-Hold Investing that is the true cause of the current financial crisis. His bio is here.