When do stock investors feel good? Kevin Maney thinks it’s when their holdings have gone up in value:
Google shares are off their highs by so much, the AP writes today that Google’s "once-robust stock is looking haggard." Haggard? Well, only if you were one of the dopes who bought it at $700 a share last fall. If you bought GOOG three years ago at $200, you’re still feeling pretty good. It’s now about $464.
Maney’s main point – that "trying to get a sense of what’s actually going on in a company by looking at [short-term fluctuations in] its stock price is like trying to get a sense of a person by looking at his reflection in a funhouse mirror" – is spot-on. But his psychology is off, I think, and in markets like the one we have now, psychology is crucial.
The fact is that most people who bought Google stock three years ago were feeling pretty good all the way through the end of 2007. But insofar as they’ve been watching their net worth erode steadily over the course of the year to date, they’ve been feeling not good but bad. Take someone with 100 shares of Google: they were worth almost $75,000 at the end of last year, and are now worth $47,000. That’s $28,000 which has just evaporated. Now it’s true that those shares might have only cost $20,000 to buy. But the main emotion, on looking at Google’s share price right now, is fear. (How much lower can this thing go?) By contrast, the main emotion for the past few years has been greed. (How much higher can this thing go?) That switch is psychologically tough to make, and it doesn’t make anybody feel pretty good.
The psychological losses are worse than the monetary losses for two other reasons. The first is that when Google was breaking through the $700-per-share level, everybody expected it to just keep on going, through $900, $1000, and beyond. Those shares were worth "only" $75,000 today: just think what they might be worth tomorrow! Individuals don’t mark to market: they consider an appreciating asset to be worth more than a depreciating one – which makes sense if they have no intention of selling. Now, of course, they have no idea how to value their Google stock. They don’t want to sell, but they do have a depreciating asset, so they feel, psychologically, that it’s worth less than the mark-to-market value might suggest.
The second reason is well known: everybody, and stock market investors are no exception, reacts worse to losses than to gains of equal magnitude. The happiness you feel when you win $100 is less than the pain you feel when you lose $100. Remember Malcom Gladwell’s piece on Nassim Taleb?
"We cannot blow up, we can only bleed to death," Taleb says, and bleeding to death, absorbing the pain of steady losses, is precisely what human beings are hardwired to avoid.
That’s how Google investors are feeling right now. And that’s why they’re not "feeling pretty good", even if – for the time being – they’re still comfortably in the money.