-Learn how to ride and control the roller coaster of emotions that comes with investing -Discover how you can preserve your capital while focusing on growth -Find out what challenges Canadians face today when it comes to investing
The recent market trends have taken even the most seasoned investor for an emotional roller coaster ride. And those feelings can have a significant impact on financial decisions, driving both savvy and irrational investment choices.
In this episode of Smart Advice, CIBC’s Managing Director and Head of Institutional Equities Mark Herzog joins us. As a seasoned trader and investor, Mark shares his insights into emotional investing and how creating a rock-solid investment plan can allow you to make well-balanced decisions and navigate the market with confidence.
If you want to discover how to have a framework around your emotions when investing, this episode is for you.
Watch Mark Herzog in “CIBC Investor’s Edge: Greed, fear, hope, regret… repeat”
Carissa Lucreziano: Welcome to Smart Advice, a podcast bringing you financial advice, investment strategies, and economic trends. I'm CIBC’s financial advice expert Carissa Lucreziano, and today we'll be talking about how investing with emotions can lead you sometimes down the wrong path, and how ignoring your instincts might actually pay off.
Investing our money is very different than saving to build up funds for a rainy day or shorter-term goals. Why do we invest our hard-earned money? Well, this sounds like a silly question, but one we really need to reflect on when we decide to invest. We invest with the goal in mind to build personal wealth to have the opportunity to have our money work overtime, outpace inflation, and experience growth through the power of compounding.
At the core of all this is also really to achieve our financial goals for the future. But investing is not easy, even for the seasoned investor. According to research, experiencing a market loss on investments during a market downturn is one of the top concerns that make Canadians apprehensive to invest or keep them up at night. Much of this has to do with the impact our emotions have on investing behaviors, and not the up and down cycles of the market.
The reality is that our emotions can overpower our rational thinking and allow us to stray from the original values and goals of our investment plan. These pure emotional investing behaviors are more common than we think. So common that it’s actually been coined as a term and an area of study called investor psychology.
Iif you did a quick Google search, it would tell you that investor psychology is the study of emotional and cognitive factors that influence the decision-making process of investors. It refers to the mental and emotional factors that can influence an investor's decision-making process when it comes to buying selling are holding on to investments.
How does this concept relate to the Canadian investor? And how can we navigate and steer our emotions away from making decisions that will interrupt us from building optimal wealth for the future? Well, here to tell us more about the concept of emotional investing is Mark Herzog, Managing Director and Head of institutional equities with CIBC capital markets.
Mark has a 30-year background in investing in trading for various financial institutions, of which the last 10 had been with CIBC. Mark is passionate about this topic and recognizes that even he, with vast experience in trading and investing, can get caught up in these impulses, but his practice self-awareness that allows him to stick to his process when he feels them creeping up. And, Mark, I understand you're joining us directly from the trading desk today. Thank you so much for being a guest on our podcast.
Mark Herzog: Yeah, thanks for that, Carissa. And apologies for the noise in the background. It's busy this morning, the Bank of Canada raised rates. So there's a little bit of emotion in the market, so excuse the background noise. These kinds of topics I always enjoy talking about because, like I said after 30 years, it still happens. It still plays out. I mean, the human beasts that we all are, we’re fighting these emotions on a daily basis.
So learning to tame them especially, we're just commenting as we were starting up here, the current market is something that people haven't seen for quite some time where we've been in an easy money environment. And now we're in tighter money environment, and trying to handle that is definitely bringing out the emotions across everybody.
Carissa: Yeah, like, I mean, I want to get into like I saw your YouTube video, I love it. I want to get into this whole, you know, roller coaster of emotions. But before that, you just mentioned something really important. I know, you've experienced various market cycles and some of the biggest market challenges like 2008 market crash and the onset of the global pandemic in 2020. That's just to mention a very, very few that you've experienced.
What do you feel the challenges Canadians are facing when it comes to investing today? Like, are they any different?
Mark: they're different in the fact that we've been used to easy money since the financial crisis that you mentioned, where we've had a lower rate environment. And that's changed now. Now we're in a tighter money environment. So I mean, you've heard that old adage, “don't fight the Fed,” just meaning that where if liquidity is going into the system, that's a risk on environment. You have cheap money, so people are looking to get a return on the money. And they'll take more risks because the cost of money is cheaper.
Now, as you're seeing, the opposite is happening. And it's really the concept of free or cheap money that we've had a little while that there has to be a cost of that, obviously, like anything else in life, nothing is free. So the cost of illiquidity was fine, I'd say we were on a decent path since the financial crisis in terms of lower rates and consistency, and then the pandemic hit. And then the government, just as we all know, just went apoplectic with the money flow.
It just went straight up and we had negative interest rates around the world, definitely not a sustainable environment. So now that euphoria is waning, and we have to return back to some kind of normal balance and what that means with the Fed tightening and getting back to normal rates. I mean, the Feds target is about 2% for inflation. I would argue that I think that level was fabricated by the Fed themself because of their easy money environment where maybe something like 3%, three and a half, if you look historically is more of a level where this may settle out.
So far, that's what we're seeing where the easy decline in the inflation rate is there. But now things are getting a little more sticky. And because of that, we're still seeing the government who got the Bank of Canada move again today for another 25 basis points to 5% on the overnight rate. So we have an environment where people are trying to figure out, “Okay, where am I? Where am I going to shake out now and my overall finances my money in versus money out?”
So far, the markets look through all of this, consumer spending remains strong. And of course, the back of that is going to be a healthy job market. As long as people are employed, they can move their discretionary dollar from, say, one night out of the restaurant to an extra mortgage payments. So so far, everyone's proven resilience, and we are earlier in the game of the rate hiking cycle. But if the Goldilocks economy of a soft landing really happens, then we could be off to the races and the market is today, for sure. Is it buying into that thesis?
Carissa: Yeah, I mean, it's for so long, like you mentioned, inflation wasn't really on Canadians' minds. Anyways, cheap money, you talk about, you know, it was just there and we became accustomed to it. I think everything that you mentioned is absolutely true when it comes to you know, where we're headed. And, you know, Canadians are facing, you know, some different challenges when it comes to where to put their money, for sure. And you just gave that great example of, you know, going out to dinner or, you know, another mortgage payment.
I want to get into the way in which investors really react and behave when it comes to investing and like, I love the YouTube video you did. You have to do more of them, it was two minutes and a bit, you have to do more, I loved it, I wanted more. It was called “Greed, fear, hope, and regret… repeat.” And you really dove into that emotional roller coaster of investing when markets are volatile, and how this can really impact our decision when investing.
Can you take us through this, because it's very, very important. I'm not sure if much has changed, you know, over decades to this behavior. And it really does impact our ability to, you know, grow our wealth over the future.
Mark: It definitely does. And, to your point about having a change, it really hasn't. Hhuman nature has not changed, and hence why you see the markets, whether it's the dot com, whether it's the recovery from COVID, both up and down, things get overdone. Why? Because the markets, emotional liquidity isn't there, and people get emotions a better part, and they just want out. The market responds accordingly.
To the opposite way, we're starting to see that now where people are under invested, they're worried there's going to be a recession. So people are under invested, you start to get spikes, like you see today where people are missing out. So you see it on a daily basis and then on a longer term basis, looking at the charts too. And it just repeats itself over time.
Doing this on a daily basis, you have to learn to take your emotions and wrap some kind of framework around them. Otherwise, you may become a little loopy or insane just from it or b) you'll go broke. I've seen it many times. I even see it like directly on the desk here with myself and coworkers who've been doing this for many years, where sometimes emotion gets the best of you. So you have to come up with a way to recognize what emotions you're feeling and how can you combine that.
The biggest way I've found over the years to do that is make sure during the trading day is you know what you're walking into, meaning that you've got all outcomes mapped out. Because if you go into the trading day without a plan, you can fall into this cycle that you're talking about of emotions, and this is a daily basis. But that same cycle can play out over a longer-term basis. If you're a longer-term investor or a value investor, you have to be a little more patient for things that come to fruition.
Either way, depending on your timeframe, your emotions are definitely the same system or same cycle. It's just a matter of the timeframe that they play out on. So for something starting like with greed, fear, hope and regret, the greed and fear can manifest many ways. Like you come in today, you see the markets up, you're underinvested, you're like, “I gotta get in, like I don't want to miss something.” So you're not really coming in with a plan, you're just coming in, like I don't want to miss out, everything's going up and you just make a decision when itt hasn't been necessarily thought through.
Just to back up a little bit before we go through on the investing side. I always liken it to other professions. A doctor is a good example, to an extreme. But even if you look at something like an actor or a lifeguard, every one of those professions take some training that's involved. Like a doctor obviously isn't just walking to go, “I want to be a doctor,” and walk into the OR and start operating. They go through a plan and some training to get there.
By default, that means when you come into game time, whether it's in the operating room, you've got the training, and you've got the mindset to handle what comes at you. If something goes wrong, how do you deal with that? If something's going well, you can speed things up, but how do you deal with that? So relating that back to investing, what I've seen over the years is the majority of people don't have that kind of rock-solid plan.
It’s more hope that they have, which is one of the biggest, strongest emotions. And hope, unfortunately, is a horrible risk management tool because it's, it works both up and down. Hope it goes higher and hope it doesn't go any lower. But at the end of the day, and to be very blunt, the market doesn't care about you as an individual and what your thoughts are. The market is its own beast.
With that in mind, you have to come up with some kind of framework to circle your emotions where greed and fear mostly to the upside, and hope and regret to the downside. So how do you do with that? You come up with some sort of investing plan that suits your timeframe, it suits your risk tolerance. I myself, I can't tolerate big swings and big losses, they're too emotionally taxing. If something's down 50%, it's got to double just to get back to breakeven.
I never want to put myself in that situation. It's a horrible mental and for that one position, it's horrible, but also affect you for the next couple of trades. Because you're so far in the hole in one trade, psychologically, your next trade, you're either gun shy, so when an opportunity does come along, you're still worried about the old position. So it really does matter in terms of what you are comfortable with in terms of your money.
Some people like Warren Buffett, he'll buy cheap and then hold for a decade. But does that mean he doesn't have risk management? Of course not. He just has different risk management than I would. He was trading on sometimes intraday basis or daily basis. So I would say just to go on the side, too, is for all these things, two things that helped me the most are looking at all the best traders, and by traders, I get people who are shorter term in nature, and what do they have in common.
There is a laundry list of things that they do have in common that do help you tame all the psychological emotions that you have.
Carissa: And you talked about something very impactful. You know, not everybody is trading on a day-to-day basis. Many individuals and Canadians are looking at, you know, how they can invest their money over time and may trade at less frequency. But I think at the core of it, you mentioned having an investing plan. What are the goals that you're investing for? And as well, what is your risk tolerance?
Like you mentioned, you know, you can't stomach that something like a 50% drop? Most Canadians can't. So you know, what is your investing plan? How long are you investing your money? What is the goal, and what are you investing for? That will be a lot easier to stick to your plan.
When investing for growth, to build wealth, you are exposing yourself to the market and all of its volatility, you know, irrespective of your risk profile, which you've mentioned. How do you best plan to preserve capital when you're really focused on growth? And you mentioned this in your video, and I'd love for you to expand on it.
Mark: Yeah, so there's, what's the best way to start with it? I'd say my approach for growth, growth and momentum I think are two that are intertwined. So at the core of it, why am I buying a stock? I want it to go higher. Okay, so how do I know that the stock is gonna go higher? Well, in the end, I really don't. But I can look historically at several different factors that would put the weight of probability that the stock will go higher in the near term.
What can things like that be? Again, you're looking for a process that you can repeat profitably over time within your risk management. So that is the core of any trading plan, whether you're short-term or long-term. So for myself, a couple of things come into play, like a simple indicator, again, back to what some of the greater investors have used something like a 200-day moving average, and the slope of that moving average.
If the stock is under the 200, moving day average, and it's sloping downward, then chances are, we're still in a cycle where you've got lots of overhead resistance on the stock, and it's going to be some time before the stock really turns around. So again, that's just a simplistic version of looking at it.
In terms of coming up with a process, whether you're an investor or trader, it's still a repeatable process over time. And then getting into what I call the trading versus investor trap. When you get into something because they think it's gonna go up, and then it immediately goes down, you're down 5%, you're like, “Well, it's like down 5%, I'm not going to sell it here.” And then it's down 10%, “I'm not going to sell it here, I still like it longer term.”
That's when you really A) before you get into the trade, you should really determine that because if you lose 2-3%, then the next trade, you only have to make 2-3% to get back to breakeven. But as you start to go further down the scale, like I mentioned, 10%, you have to make 12, and the fifth percent, you got to double your money.
So even though you're a long-term investor, if you really believe in this company, why is the market not believing it and now versus your opinion? So everyone has an opinion, but the only opinion that matters is the market. So what happens when people get into trouble as they get stronghold, and believe their opinion and say that the markets wrong.
May be the case, but what's your timeframe on that? So how do you keep yourself out of that? You've really got to learn to take a loss and it's the hardest, hardest thing to do because again, back to your emotions. People don't like to admit the wrong.
Carissa: Exactly.
Mark: But if you, again back to traders that have in common, the number one thing is risk management. And part of that is cutting your losses short. Some of the best traders in the world have less than a 50% hit rate on their trades, but they're still very, very profitable. And why is that? I just go back to the math again, because you're taking small losses. And then when you're right, you're maximizing that.
I mean, again, it sounds simplistic and easy, but they're all generally rules base that they have. So when they know they're going into a trade, whether I'm buying Telus now that hits 52-week lows. I like telcos, I think they're going to turn around even if there's a threat of Amazon or whether that's all the pricing competition now, because of the Shah.
What if it goes down another 20%? Like, do I want to be in that position? And am I comfortable with that to ride it out? Because I think in the next 10 years, it will go out. So it's really looking deep within to yourself and to tame those emotions on the upside and downside is what are you trying to achieve? And what can you tolerate in terms of risk management?
That's a really personal question, something you need to work with, through yourself first, and then working with your IR to get through what your goals are, and in what timeframe you're looking to achieve those, and how much volatility you can handle on your portfolio.
Carissa: Yeah, yeah, absolutely. I mean, in some times, these losses are a blip in time, like you mentioned in your video, the example you use was tech stocks from you know, 2021 to 2022. And you looked at things like Meta, down 62. Netflix downn 46.
If in that capitulation, which is really the definition part of it is like surrender, if you absolutely or if you do surrender because you don't have that process and plan in place to understand that long-term plan or how long that you can you're investing your money for, you could absolutely put a dent in your long term growth by selling at that point.
So absolutely right. And all of this really comes down to what we've been talking about is having a plan, having a process understanding what your goals are, how long are you investing for, and you mentioned, advice. And advice is so important around this is doing this a day in and day out, is, you know, part and parcel a lot of what you do this is your profession and what you've been doing for 30 years.
This is not the everyday norm of Canadian investors. So having a sounding board with an advisor and someone that can help you build out this plan, what are your goals? What are you saving for? What are you investing for, and to help you stick to that plan is also extremely important and impactful in the journey.
Mark: The biggest thing, and this may sound a little sarcastic, but in the end for all the advice that's out there the talking heads on TV, analysts, so nobody knows. Nobody knows for sure. Right? Everyone has an opinion. So for me, one of the aha moments was having an opinion. But what's the market structure around that meeting? Take an opinion. But what is the market saying about the stock right now?
Like is it in? Is it in an uptrend? Is it below moving averages? Where is it now? So it's marrying your opinion with the market? And I know that can some people don't want to get into that level of detail, which is fine for an investing plan. But at the same time, it doesn't excuse risk management. You don't have to get into the details on the chair.
Even if you're buying an ETF if you, something simple, where you're just buying an ETF because you know I'm investing for the 40 years and any drawdown I'm just going to add to it. That makes sense. But if you're like you mentioned the tech stocks, individual tech stock, which introduces way more risk, then broad-based ETF, single stock risks, operational risks, execution risk, are you able to really, or your position size correctly, ie is at 50% of your portfolio, or five which comes into things you can narrow drawdown.
You have to really look at the things that you control, which are your position size, where you buy, and where you take profits, and where you take losses. So only control what you can control. So you have a plan because there's so many things that you can't control. And again, like I mentioned, like all the information I assimilate every day, I literally tell myself, nobody knows for sure. So how do I combat the fact that I don't have certainty?
It's through that risk management and having areas where I admit that I'm wrong. And then I wait for the next environment. And the other part two, again, this is more of a market timing. This is definitely more trading for myself. Sometimes the best trade is no trade or I'm sitting out of the market. And that's because my trading criteria, nothing is showing up. So if nothing showing up. I'm not going to trade because that is my trading criteria.
It saved me, I guess on the downside too, is weathering moments like we're just went through like you went through the COVID where I'm out because the markets not acting like my criteria. So I'm out of the market. So I developed that over time by continually looking back and looking at examples and looking for commonalities in those examples. Like if the markets below the 200-day average, what industries are doing well what industries are doing not.
I can go into it at nausea about the different ways and different strategies but the point is there is a strategy and developing that is the single most important factor with risk management for long-term building wealth.
Carissa: Yeah. And that's essentially your plan. So you know, and we've talked a lot about today how to become a resilient investor, how to, you know, keep the noise of your emotions away and staying on track. Like, you've given us some great tips. Some of the big things that I'm hearing is having that plan, whether that's investing plan, setting out your goals, having an investing plan, keeping discipline with your process, and, you know, not straying from that.
A lot of these things will help build the resiliency, that you really do need to be an investor over time. So you know, Mark, thank you so much for joining me on the podcast today. Any more YouTube videos in the future?
Mark: Oh, I don't know. I think my face is built for radio in terms of that. I want to do more podcasts. But just to add, one final thing I would put on is, one last thing is be backward-looking in your own trades, ie, if something goes right, and something goes wrong, go back and review it. See why that is. Was it an entry thing? Was it a timing thing, and then put it back to the other research you've done in terms of that.
That was another big aha moment for me, too, was going back and reviewing my old trades to see how I can improve, see were there common mistakes that I was making. So looking backwards really does help you move forward. It's no different than when you write your math test, you find out what you got wrong. You have to go back and see how you do it right.
But again, with investing, people have their emotions involved and don't do their homework as much. And they're just very hopeful. But if you go back and review, you'll see commonalities over the last 10 trades, I guarantee you'll find things that are common that you can improve upon going forward.
Carissa: Yeah, yeah, no, absolutely. Great point. And you should be reviewing your plan. Looking forward, what are the things that you want to amend? And what are the things that you want to stick to you? It's very important to do that. So thanks again, Mark. Really loved the conversation today. Emotional investing, this concept is talked about a lot. You see it in articles and research all across the board in terms of you know, how it affects us building wealth over the future. So thanks again for joining me.
Mark: Appreciate that, Carissa, very much. Happy healthy and happy wealth, everyone.
Carissa: Thank you, you too. As we have discussed today, investing is a fundamental component of building wealth for the future. It takes self-awareness to keep emotions in check and a concentrated effort to stick to a plan to achieve financial goals for the future.
Thanks for tuning in to this episode of the Smart Advice podcast. To make sure you never miss an episode, subscribe or follow on your favorite podcast platform and visit us for more advice at cibc.com/smartadvice. Thanks for listening.