Tuesday, November 7, 2017

Pip Watching

Imagine a hypothetical portfolio. This portfolio has a very healthy performance of 15% pa. The volatility/variance of this portfolio is roughly 10% per annum. Despite this, the probability distribution of price moves for any short time periods between one second to one day is just slightly better than 50-50. If an investor is assiduously following the price moves of this portfolio more than once per day, the statistical expectation is not much better than watching the outcome of a flipped coin.

Various studies have shown that the emotional impact of a loss is nearly 2.5 times the impact of a gain. Accordingly, the consequence of pip watching is net emotional deficit. And the absolute net impact gets bigger with increased frequency of pip watching, and also increased number of portfolio positions.

Bear in mind that 15% pa with 10% variance over a long period of time is a great performing portfolio. This means that a lesser performing portfolio will not be any better for the constant price checker. It may in fact be far worse. Further, there is also a feedback loop in place. The net emotional deficit may feed through into deteriorating performance, which will increase the emotional deficit, leading to a vicious cycle. At the same time, the random nature of punishment and rewards in pip-watching gives rise to addiction similar to the process in gambling. 

The physical consequences of chronic stress from pip watching include high blood pressure, diabetes, hormonal imbalances, possibly brain damage, eye problems and a whole other variety of ailments. An investor that keeps at this bad habit for long periods of time may actually be accumulating money at the expense of health. Wealth, happiness and well-being arise from a well-lived life, not just the bank balance at the end.

In other words, pip watching can severely affect your health, and also your wealth. 

Don't do it.

Stay healthy, enjoy and prosper,
Yours One Legged

No comments: