My mum passed away last week after a brief battle with the German healthcare system. She leaves behind all sorts of legacies. One of which is a truly exceptional investment track record. The sort that would make you downright suspicious. How did she do it?
Well, one of my earliest memories is hearing her ‘debate’ stocks with my grandparents and father. My mum always ended up being right, of course. At least it sounded like it from the safe distance of my bedroom, where I was trying to go to sleep.
As I grew up, I discovered that her returns matched her emphatic overconfidence. My sister was astonished by her net worth as we tried to figure out her affairs. But I’d suspected her hidden genius for a while.
Her various bankers, however, learned about it the hard way. She’d assign them some funds to put to work. And invite them to her kitchen table to report on their returns each year.
It turned into a humiliation ritual for some of Germany’s proudest financial institutions. My mum would compare her personal portfolio returns to theirs and give them an absolute pasting for their trouble. Not many could handle more than one round in the ring. One poor Austrian fellow even retired.
The secret sauce behind my mum’s outperformance is something I want to tell you about today.
But it’s a cautionary tale. Definitely don’t try this at home…
Timing the market versus
time in the market
Some investors get wealthy by timing the market. They buy the dips and sell the rips.
Others use a more passive aggressive approach – buy and hold on for dear life.
My mum was a master of combing the two like no one else.
On the one hand, she was very good at ‘set and forget.’ I don’t think she’s bought or sold a stock since 2020. And her German-heavy portfolio has thrashed the rest of us as a result.
However, she also had the capacity to be impulsive. You simply wouldn’t believe what she got up to. My childhood babysitter told me some astonishing stories. And the surprises extended to her investment decisions.
I know of several occasions when she perfectly timed the stock market on pure emotional nous.
Not just a bit, but with her entire fortune.
She sold the lot before the 2008 financial crisis, for example.
And she bought back in at the bottom in 2009 too.
Such moments of genius were triggered by the strangest of investment signals: a serious mental breakdown. The sort that gets you locked up in a hospital in the Scottish Highlands.
Irrational decision making
in an irrational market
My parents were the first generation in both their families with serious wealth. And the emotional rollercoaster of fluctuating asset values got to my mum. Looking back, it may have been what splintered our family 22 years ago.
For most people, large losses trigger a panic. They make bad decisions as a result. Like selling after a stock market crash. That’s how they miss the rebound.
But my mum was different. The more her portfolio gained value, the less stable she’d become.
Watching her burgeoning portfolio gain and lose more money each day than her own family had ever had would sometimes tip her over the edge. Her eccentric nature would turn into something more dramatic.
Each time the markets hit nosebleed levels, she’d have a meltdown and sell the lot.
While we were busy dealing with the emotional and legal fallout, my sister and I would fail to notice the financial impacts of her panicked investment decisions.
But, looking back, a stock market crash would surely follow within a few months of my mum’s decision to sell everything and then wreak havoc…
My mum’s mental breakdown would eventually end…
And the bargains on offer would entice her back into the market.
It worked like a charm, compounding wealth at an extraordinary pace each cycle. Sadly, at the expense of everything else in her wild life.
What if the market
stoics are wrong?
Financial advisors tell their clients to check their emotional baggage at the door of the stock market. The two don’t mix.
But what if this stoicism is throwing the baby out with the bathwater? What if it discards an incredibly useful tool that can help you invest successfully?
The emotional intensity of the stock market might be an indicator you cannot afford to ignore. Just as I should’ve listened closely to my mum’s fluctuating mental health over the years. A sure sign of when to buy, sell and hold.
You can almost smell the irrational nature of a buying frenzy at the top of a stock market boom. Sometimes, even central bankers know what’s going on.
In 1996, Former Federal Reserve Chairman Alan Greenspan warned about ‘irrational exuberance.’ And he would know. In 1999 and 2003, he funded such irrational exuberance with excessively low interest rates. First in the stock market and then in the property market.
The man responsible for inflating the tech and housing bubbles was fully aware of the emotional frenzy he created.
It’s not just greed, though. Negative bond yields are an example of excess fear. People were willing to pay money to lend to a safe borrower. It had to reverse eventually…and it did so violently.
When I first came to Japan in 2020, I was chastised by my father in-law for speaking about the stock market. Too many people had committed suicide over the crash in the 90s. It was rude to remind anyone. But, looking back, the period of maximum disinterest was the time to buy.
My father in-law was keenly aware of this himself. When gold was described as a ‘barbarous relic,’ he was busy buying.
The point is that you should endeavour to be fully aware of the emotional state of investors instead of trying to ignore emotions. That’s because turning points happen when emotions get the better of investors. When those emotions are obvious through magazine covers and mental breakdowns.
When things get as absurd as my mum’s life during a stock market peak, you know it’s a peak. When it’s rude to even mention stocks, and my mum is back to some semblance of normality, you buy. The rest of the time, you can safely pay minimal attention.
I wasn’t able to ignore my mother’s emotional state over the years, try as I might. Her increasingly bizarre comments on my articles led us to turn off the comments section on our website…
If we’d kept them, subscribers and I might’ve noticed a correlation between stock market peaks and how eyebrow raising her comments were.
Speaking of which…
Whose emotional state you
can still profit from
Sadly, you’ve missed your chance to profit from my mum’s volatile emotions. I did pitch making her an analyst at one point.
Who will replace her as the best investor I know? And what strategy do they follow?
Two of my fellow editors are vying for the title in this video about how to invest $10,000 today.
Neither of them will ever be as eccentric as my mum. But that’s probably a good thing, for all of our sakes.
Regards,
Nick Hubble,
Strategic Intelligence Australia
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