nvestors are a motley crew, but market players can be roughly divided into four types, based on how much they like throwing themselves off cliffs into a fog.
1. The first type is avowed risk haters. They can’t bear losses, and knowing this, they almost entirely eschew investments that could lose value. Risk haters put their money into savings accounts and deposits, government bonds and short-term, blue-chip corporate bonds. Investors of this ilk have to settle for low returns over time, but their decisions are rational and reasonable. Risk haters knowingly forgo the chance of better returns in order to sleep peacefully at night.
2. The second type of investor is the consistent one, who holds a certain, pre-determined, proportion of assets that by nature fluctuate in value, such as stocks and corporate bonds that aren’t super-conservative. This type knows he will suffer losses from time to time, but he’s prepared to stomach the ride in the hopes of achieving higher returns than the ultra-conservative investor. This is also a perfectly rational way to behave. The investor builds a portfolio that may return more over time, at the cost of mid-ride jitters.
3. The third type is the speculator. The daredevil. The speculator wants to earn a lot and fast.He risks, he dares. Speculators generally believe they can beat the game and profit from making short-term dips into high-risk financial assets. The investment patterns of such investors are often driven more by psychology than financial data. They just love to play the game. There’s nothing wrong with this sort of investing, as long as one can afford the losses. Gambling a small portion of one’s total wealth is perfectly fine, as long as the rest is handled sensibly.
The problems − such is life − start when the dosage of speculation gets too heavy, passing the realm of common sense, and when the speculator loses more than he can comfortably afford. It happens mainly when the market is red hot and people get carried away, over-investing in a particular area. The result can be tragedy.
4. The fourth type is the fruit fly, zipping from one tempting juicy fruit to another. The zigzagger. He is all of the above, at one time or another, changing his skin with the weather, and fast. When the skies over the markets turn cloudy, when prices are falling and the headlines are grim, our fruit fly becomes Type 1: an avowed risk-hater. He turns his back on the crash zone and puts his money into makams (short-term Bank of Israel notes) and deposits.
When the sun comes back out, he suddenly regains his nerve and morphs into Type 2, the sensible, consistent one. He puts 20% to 30% of his money into stocks and 30% into mid-range corporate bonds.
And when the sun is burning and the market turns hot, our fruit fly loses interest in conservative sensibilities and changes his skin yet again, jumping into highly speculative technology stocks, oil exploration partnerships and the like. People are making money hand over fist, and he wants a piece of that action.
The fruit fly’s underlying assumption is that he can time the market. He thinks he can sense when to increase risk in order to increase his gains, and when to flee from it to avoid losses.
Sadly, our fruit fly is wrong. He doesn’t know how to time the market. Nobody does.
Nobody knows for sure when the market will rise or fall. Emotions − euphoria in a bull market, despair come the bear − cause irrational timing mistakes. Our fruit fly thinks he can reap the wind and avoid the storm but will probably wind up doing the very opposite. Fruit flies get their timing backward.
Come the Israeli
Every market has all four types. It’s human nature and there’s probably nothing to be done about it. But there’s something different in the Israeli investor.
The proportion of zigzagging fruit flies in Israeli investment circles is higher than elsewhere in the West. Their spoor is evident in the “hot money” zipping into and out of the market with changes in the weather.
The man in the street may invest mainly through mutual funds, not personally managed portfolios, but the result is the same − he puts his money in and yanks it out of the fund lightly, much more casually than his peers in America or Europe.
The proof of the pudding is in the eating and this one can be a bitter dish. Solid investors may have to settle for mean returns, but they can sleep tight at night. Conservative investors may not sleep as well, but over time they return more. Gamblers usually lose, but at least they get their jollies along the road.
The fruit flies reap the worst of all three scenarios.
Because they get their timing backward, they don’t earn money. They lose it. They don’t sleep well because they’re often up to their eyeballs in risky assets and they don’t even enjoy the thrill of speculation because it isn’t part of their nature.
I don’t know why this happens. But the fact is that a large proportion of Israeli investors are fruit flies. Maybe it’s a national characteristic, maybe it’s a cultural thing or maybe it’s because nobody ever told the Israeli investment community that zigzagging is a bad thing.
Too much information
These very same people behave very differently when it comes to different savings avenues.
Provident funds and study funds (keren hishtalmut) often put some − quite a bit, actually − of their money into risky assets, such as stocks and corporate bonds. These funds can therefore lose as much money as your average portfolio in the short run. That is what happened this year, for instance. Yet the proportion of people zigzagging from one provident fund to another, from one study fund to another, is vanishingly small.
Most people have both long-term and short-term savings. They stick their money into a long-term savings avenue and leave it there. But their habits with short-term savings are completely different.
The reason is mainly psychological. They keep a beady eye on that short-term saving plan, judging its performance constantly, and they control it. People tend to feel they have to react, to do something, and since they can do so at the click of a mouse, they do. Never mind what they do, they just do. On the other hand, taking your money out of one provident fund track and sticking it into another is complicated. You have to call investment managers, fill out forms.
Behavioral scientists have long claimed that too much information is harmful. It isn’t conducive to making well-informed, wise decisions. It just makes people frantic.
The author is the CEO of Psagot Compass.
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