One of our Senior Portfolio Managers, Harold Parker, has a saying: “To the disciplined go the spoils.” Now there is academic research that supports his point.
From the study by Lo, Repin, and Steenbarger, “Specifically, the survey data indicate that subjects whose emotional reactions to monetary gains and losses were more intense on both the positive and negative side exhibited significantly worse trading performance, implying a negative correlation between successful trading behavior and emotional reactivity.”
That’s a pretty good summation of the problem. The more emotional traders were, the worse they did. Panic and euphoria, which lead to pulling out at the bottom and piling in at the top, are not helpful in financial markets. We find that basing our investment approach on an adaptive, systematic process is very helpful in avoiding the emotional ups and downs of the marketplace.
—-this article originally appeared 9/9/2009. It’s good to keep in mind that emotional reactivity will damage your returns, especially in a market like this.
