About 35,000 years ago, one of our ancestors made some tally marks on a bone. What he was keeping track of is unknown. What we do know, however, is that numbers inevitably followed. Numerals, numbers, digits, figures; pick a name. They rush through the portals of our eyes and ears and scurry to our brain. Once there, they begin their incessant chatter. Most of us don't pay much attention to their small talk of plusses and minuses, ratios and returns, percentages, means, averages, and on and on. We don't care about all that. Thinking is hard work. We're lazy. We're into instant gratification. We want the final number, the old bottom line, and we want it now.
With that final number, that special number, we can justify our actions. Our perception of that number becomes our reality, our truth. A good example of this is when an investor pays fifty cents a share for a thousand shares of some pink sheet leper. "Hey," he thinks, "what have I got to lose if this thing tanks. A lousy fifty cents a share." A $500 loss has been reduced to fifty cents.
If the numbers are reluctant to support a particular undertaking, we'll go to great lengths to convince them otherwise. We'll slice, dice, and crunch them. We'll take them raw or if need be, some of us will cook them. Numbers don't lie until we coerce them.
And when those little rascals can't be coerced, they're ignored. We buy a lottery ticket in the morning and spend our workday dreaming of how we'll spend our winnings. 15 million to one doesn't pertain to us. Odds are for other people. We're special.
We roll the dice, and the spots become numbers, and the numbers become illustrations and personifications. Boxcars. Snake eyes. Cross eyes. Little Joe. Nina from Pasadena.
Ironically, when numbers are employed to help us do great things is when they become most mundane. Numbers make it possible to explore the surface of Mars and peer into the innards of the Titanic. We stare in wonder at all the fantastic achievements of the human race and ask ourselves, "How?" Numbers. Boring numbers. The fun starts when we ask those little critters to measure something immeasurable.
By our very nature, we, as investors are irrational. Our emotions take over and we do stupid things. We buy when we should sell. When stocks are cheap, we want nothing to do with them. Why? The big number. Whether it's Dow 14,000 or Dow 7,000, the big number is what we are fixated on; it's our crutch, our teddy bear, our security blanket. The big number validates our decisions, and invariably, because we constantly misinterpret what the big number is trying to tell us, our decisions are usually wrong.
The irrationality of investors is supported and enhanced by the media. You can't blame them. Competition is fierce. You've got to attract readers, listeners, and viewers. Let's listen to two fictitious radio announcers describing the same bad day on Wall Street.
Announcer 1, from Station WZZZ.
"Good evening. This is Hal Bland with the latest news from Wall Street. The value of shares in many companies fell today as concerns about the economy in the near term caused investors to sell."
Announcer 2, from Station WOMG.
"Good evening. This is Betty Breathless with a breaking news alert from Wall Street. Stocks plummeted today as rampant anxiety about the shaky economy caused already panicky investors to run for the exits."
WZZZ will be out of business in six months.
Take a look at the headlines: 'STOCKS SOAR', 'STOCKS NOSEDIVE', 'MARKET MELTDOWN', 'THE BULL CHARGES ON', 'INVESTORS FLEE', STOCKS IN FREEFALL'. It's a wonder we make any money at all.
We don't buy shares of a company anymore. We don't look at ourselves as partial owners of a going concern. We buy stocks, and stocks can be naughty. When the price of our stock drops, we feel betrayed. We've spent our hard-earned money for that stock and now it has let us down. "How dare it!" we fume. When the price goes up we brag to our friends about our stock as if it were our overachieving child. As it rises, it takes our ego with it. "Savvy," we think, "it's great to be savvy."
But when all of our stocks misbehave, along with those of everyone else, we look at the big number, and we tremble. We can feel the clammy fingers of fear closing around our throats. That bravado and swagger we had when we bought our stocks has evaporated. The big number is shrinking. Everyone is getting out! Sell at the market! Sell! Sell! So we get out. At least we avoided the bottom. Our 30% loss could have been 50%. Whew.
But someone was buying, weren't they? The whole time the big number was unraveling, someone was buying. Hmmmm. Perchance, was it you?
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.