Taking the Emotion Out of Investing

Yoda should have worked on Wall Street.

The 400-year-old Jedi Master from the Star Wars movies always preached to his students to purge fear and anger from their emotions, so they could view the world more objectively. That’s exactly what Wall Street pro Robert Fischer, author of The Naked Portfolio Manager from Abbalucci Press, believes people should do when approaching their investments.

“In the investment world, there is rarely a good decision that is based on fear or anxiety,” he said. “Invariably, people wind up going with a gut feeling and wind up ignoring all logical evidence to the contrary. Along the same lines, even positive emotions can cloud our judgment.”

He goes on to say that the best approach to investing is to apply a set of rules to govern investment strategies. In his position as a portfolio manager, Fischer predominantly uses what he has identified as “statistical prediction methods” (SPMs) to oversee custom portfolios for high-net-worth clients. He has employed SPMs for more than ten years and said he has observed, over time, how this methodology consistently puts clients’ earnings on par with those managed by the smartest minds on Wall Street.

“Rules trump reason on Wall Street. Financial planners are constantly reading about this expert’s advice or that expert’s advice,” he added. “They would do much better if they simply used a set of clearly defined, empirically-based, transparent rules and followed those rules in a disciplined fashion.”

Fischer said that SPMs are relatively simple rules for selecting securities. They are easy to comprehend, and the planner intrinsically understands exactly how the securities in the portfolio are selected, and can easily explain it to the client.

For people in the industry to achieve similar success for their clients, all they need to do is to adopt a clear set of rules on choosing investments, and apply the character necessary to stick to those rules, according to Fischer. The key is for planners and brokers to be able to change their way of thinking about how they approach their clients’ investments, according to Fischer.

“We need to forget what we think we know about the market and start from scratch, or be ‘naked,’” Fischer added. “If you simply start with a blank sheet of paper, and assemble a set of rules that are based on empirical data — and stick to them – you’d be surprised at how much more successful you can be.”