The movie, "The Day After Tomorrow" was released on DVD recently, and I jumped at the chance to take this film home. After I viewed the movie once, I decided to watch it again. I love fake disaster movies, especially when Dennis Quaid's name is listed on the credits. Additionally, I adore films that contain corny plots, bad dialogue, and great special effects, and this movie has it all.

My only problem was that the Weather Channel began to frighten me. I couldn't view a cloud cover over North America without envisioning flash-frozen dinosaurs. I wanted to move west and below the Virginia state line in case we all needed to migrate to Mexico within twenty-four hours. I even considered how I might keep a fire going in this apartment for two days without burning down the entire building.

Then I began to get a grip on weather reality (it IS December, and it WILL get cold this winter), I also realized that the weather is no more predictable than the stock market and visa-versa. While Joe rambles on about temperatures, the folks on the stock market channels ramble on about consumer confidence. When Dave gives new meaning to the word, "cloud," the folks on the stock market channel redefine market mentality. While Paul describes flash flood photos, the stock market folks flash photos of the latest presidential results. Finally, I decided to do what I often tell my daughter to do?turn that TV off, because all this information is creating a nasty feedback loop.

It was then that I realized how lucky long-term buy-and-holders are compared to day traders and short-term investors. Most long-term investors can weather the storms, because we know that we're into our holdings for the long haul and because we try to avoid emotional decisions. After I turned off the TV, I turned to the Internet and surfed to Wikipedia, the Free Encyclopedia, where I found information that shows possible links between emotional intelligence and investor behavior.

Basically, this intelligence isn't based on reason or other mental processes like the ability to learn or think about the future. This intelligence is based on the interplay between humans and market behavior. We all know that emotions are sometimes volatile (as volatile as the stock market or the weather), and in 2002, Hersh Shefrin declared that there are three main themes in behavioral finance and economics. They are as follows:

1. People often make decisions based on approximate rules of thumb, not strictly rational analyses.
2. The way a problem or decision is presented to the decision maker will affect their action.
3. This one doesn't make much sense as written at Wikipedia, so I'll attempt to explain it based on Shefrin's book, "Beyond Greed and Fear: Understanding Behavioral Finance and the Psychology of Investing." Basically, most attempts to explain market outcomes which are contrary to rational expectations and market efficiency becomes market inefficiences. In other words, once again the way a problem or rationale is presented will affect a decision maker's action.

Don't those key themes sound like a scenario for short-term investors? If an investor doesn't conduct rational analyses, he or she is gambling, not investing. That's like throwing money at the horse races, which are one-time, short-lived, events. As for #2, if we believed everything we saw on TV, we might run around screaming to put our money under the mattress, not in the market. This is how many irrational people react to problems presented by various news sources.

If we take a look at loss aversion in this group, we find that many market investors seek high gains while trying to avoid losses. This also sounds like short-term investor behavior, because long-term investors know that, outside a little outstanding luck, most market investments may return 11% annually. That's it, unless the stock market is bullish. Even then, high-risk stocks that might fly through the roof are only part of a diversified portfolio that climbs slowly over the years. However, we also know that this investment return is much higher than that of most investment tools, like compound-interest savings accounts and bonds (but don't forget to include these items in a diversified portfolio). It is also necessary to remember that the securities markets are subject to the risks of fluctuating prices and the uncertainty of rates of return and yields inherent in investing and past performance is no guarantee of future results.

Of course, long-term investors also try to avoid losses and seek gains. But, we don't seek higher risks to mitigate our high-risk losses, and we don't worry when lemming-like masses of short-term investors affect the market with their actions. We know that these groups are only a small part of the overall scheme of things, like a short spring shower during a picnic, or falling barometric pressure during a hurricane. But, we do remember to buy low and sell high, so if that stock goes through the roof, a quick reaction might save an unusually high profit in a volatile high-risk equity.

So, if you're worried about all the "stuff" you hear on TV, and this "stuff" is affecting you emotionally, just turn off the TV and don't even turn on the computer. Just go enjoy your kids or a good book (a comedy, perhaps?), because not much will happen to affect our decisions as a long-term investors anyway. Think rational, think serene, and pull out the blankets and warm, woolly socks, because it's going to be winter soon. After all, the map of that jet stream did resemble a volatile chart pattern this morning?

Until Next Week,
Linda Goin