Lessons in investing from one of our most respected financial journalists.
Most readers may not remember Jason Zweig's stint with Africa Report Magazine in the early 1980s, or his writings on sports and entertainment for Time-Life News Service in 1986, but they do know he's been one of our most prolific writers on investing since that time.
As well as his writings for Forbes, Time, and Money magazines, Zweig has authored two books--most recently YOUR MONEY AND YOUR BRAIN: How The New Science Of Neuroeconomics Can Help Make You Rich (Simon & Schuster, 2007). And--still unknown to many--beginning July 1 he will leave Money to fill a key personal-finance slot at The Wall Street Journal.
We talked to Zweig about his career and his latest thoughts on investing, the current stock market and his upcoming appearance at the Morningstar Investment Conference.
David Drucker: Jason, you've written a regular column for Money magazine since October 1995. How do you keep your material fresh?
Jason Zweig: The key is to try to find new ways to say the same old thing while sticking to what's right and true. A lot of content is repeated, but it must not be apparent to readers. That means constantly searching for new evidence to prove the same old thing, which is what initially led me to study behavioral finance and, eventually, neuroeconomics.
DD: How would you define neuroeconomics?
JZ: As you would guess from its name, neuroeconomics is a hybrid of neuroscience and economics with a lot of psychology thrown in. Neuroeconomics asks the question: "What is happening to the brain's wiring that generates the financial behavior people exhibit when they invest or make other decisions about their money?" By analyzing what goes on in the brain, the most important thing we learn is that investing is a profoundly emotional experience. Most financial advisors like to believe the process is rational, objective, and that there are right and wrong answers... in other words, with enough understanding, you should always get the result you want and expect. Neuroeconomics shows it's almost impossible to take emotion out of the financial decision-making process and that's not always a bad thing; it's just very important to recognize how important emotion is to personal finance. Fear, greed, hope, regret, surprise and disappointment all must be acknowledged. Advisors need to let clients know it's OK to feel pain when the market crashes. We'd like them to be like Warren Buffett and just shrug it off, but few people can do that. The way to manage that is not by pretending the emotion doesn't exist, but by helping people recognize that intense emotion, and the fact that they must not act upon it. In other words, it's OK to be afraid, but it's not OK to make financial decisions in a way that's fearful.
DD: This sounds a bit like the field of genoeconomics.
JZ: Genoeconomics, or looking at people's genetic profiles and investing habits, is very interesting. People's DNA has been studied through finance experiments to see if there are particular genes that correlate with certain kinds of behavior. A couple of genes have been identified that relate to impulsivity. For example, people who have a hard time saving or whose money burns a hole in their pocket appear to have a certain genetic structure different from that of other investors. Obviously, this sort of thing raises the same ethical issues as any genetic research. [In the life insurance field, for example], should an insurance company be allowed to refuse coverage if it finds out you have a genetic predisposition to cancer? Genoeconomics might raise similar issues; if your financial planner has this gene, do you want to stay with him?
DD: Getting back to your book, I noticed that Mike Clowes of Investment News says in a review, "This is a book every financial professional should read--and reread at least annually." Did you write the book for financial professionals?
JZ: No, I wrote it for individual investors, but I believe--and many advisors have told me this--that if you are a financial advisor and you read between the lines of the book, you can get a lot out of it that most individual investors wouldn't notice. Advisors will find [as a takeaway] potential tools and new ways of thinking about investing and portfolios. Even if they just read the book as written and don't attempt to go beyond its message for individuals, professional advisors should be able to understand clients better by learning the lessons of what science has shown about behavior. Several advisors who have read the book have asked me, "So what you're saying here is if I did this, then It would probably be easier to get my clients to do that," and I say, "Yes, you might be able to apply that lesson in this particular way." The book often sets off ideas for those advisors who read it, and anyone who writes a book will tell you that one reward is learning that different readers can draw different lessons from the book and each person who reads brings her own experience to it. In fact, some readers will see things in what you've written that you might not have realized were there, and that's very satisfying.
DD: Before your most recent book, you edited the latest revision of Benjamin Graham's The Intelligent Investor. Are Graham's writings still relevant today?
JZ: When I was first asked to edit the book, I asked myself that same question. The book was last revived in 1972 based on the original book authored in 1949 which was based upon Graham's experiences investing in the market of the 20s and 30s. If you think about the world of 1972... Warren Buffett was managing $17 million, NASDAW was just a year old, and 401(k) plans didn't exist. Nor did index funds at the retail level. That's the world in which Graham wrote. Yet, I believe the book is still relevant today. First, Graham was really one of the smartest people ever to manage money--on many levels. He wasn't just IQ smart, but had enormous amounts of common sense and understood human psychology too. His insights on what had happened in the past read like an analysis of what's going on today or, as we are often reminded, there's nothing new under the sun. Read his description of what the stock market was like in 1929, change a few names and dates, and it's a perfect description of the Internet bubble. He was simply one of the best teachers on investing who ever lived.
DD: Is there any one Graham message you find particularly relevant today?
JZ: Graham has really important things to say about the difference between investing and speculating. Jim Cramer talks about investing and calls himself an investor, but he's really a speculator. In fact, most people are really speculating rather than investing. Graham says speculating is buying something that's been going up in the belief that you'll be able to find someone to pay even more for it. There's nothing intrinsically wrong with speculating; it's just a problem to call it investing when it's not. Investing has a specific definition, according to Graham: "An investing operation is one which upon thorough analysis promises safety of principal and adequate return." Speculators don't do a thorough analysis; they just see something moving [in price] and they buy it. They don't think about safety, and they want more than an adequate return.
DD: Does this have a special significance for financial advisors?
JZ: Yes. Some advisors don't work carefully enough at figuring out whether their clients are interested in investing or speculating. Some clients want to do both, and that's OK too. Any financial behavior is OK as long as either the client or the financial advisor understands what's going on. There's nothing wrong with going to Vegas a couple of times a year as long as you know it's gambling and can afford to lose what you gamble. If you're gambling because you think it's a way to make a living, you have a problem. And if you watch Cramer on TV and think you'll become wealthy doing what he's doing, then you have a problem. You're using speculation as a substitute for investing and the two are very different. Speculation should be a form of fun--not a way to get you to your financial goals.
DD: What's your interpretation of what's going on in the market today? We've watched it waffle up and down with little permanent progress for about a year now.
JZ: As I view it, the problem is even more long term: the market has gone nowhere for eight years. People--because of media and human attention--focus on the short term and miss sight of the longer-term picture which is that the NASDAQ has lost over half its value in eight years, the S&P has gone nowhere and, unless we have an extraordinary bull market in 2009-10, the market will still be roughly where it was in the spring of 2000. Chances are it will be a couple more years before we start to see positive long-term returns again, and that's the reason why people are so sensitive right now to get-rich-quick schemes and why they're so easily persuaded to speculate. Think about what's happened with real estate. Things like option ARMs, no-money-down deals and property flipping told investors there was risk, and they'd been burned before on dot-com stocks, but they invested in real estate anyway. The fact that stocks have done nothing for almost a decade has brought out the speculative nature in people. Couple that with the fact that interest rates remain low so people can't do anything safe with their money because [safe investments] offer no return, and it's a dangerous time for clients. They're quiet but they're also desperate. Now is the time for advisors to really be talking straight with clients, asking them how they feel about what's going on in their portfolios and how the advisor can help them feel better about what he or she is doing for them.
DD: Thanks for your insights, Jason. To wrap things up, can you give us a preview of what you'll be discussing at the upcoming Morningstar conference?
JZ: What I'll talk about is how behavioral finance in general and neuroeconomics in particular can help us understand the influences on our decision making that we're not aware of. Some financial decisions happen automatically, instantaneously, without you ever being aware of them. Your mind makes up its mind in a fraction of a second and you may never even know this has happened. You'll think your decision is the result of a thought process, but it was actually your emotions making your decision for you. That that happens is well documented in neuroeconomics. Emotions like fear and hope and regret and surprise determine what clients do. The question--which we'll explore during my talk and in Q&A--is how often do advisors interact with their emotional clients without necessarily realizing that decisions are being made based upon these emotions? Both clients and advisors overlook the fact that the mind has a mind of its own.
DD: Jason, best of luck with your talk, your move to The Wall Street Journal and your future research. We appreciate your time.
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