Money Matters: Stock market hypochondriacs

By Jonathan Citrin

"Hypochondriasis, or hypochondria, is an overwhelming fear that you have a serious disease, even though health care providers can find no evidence of illness. People with hypochondriasis tend to misinterpret normal body sensations as being signs of serious illness. Most people occasionally fear they have an illness, but people with hypochondriasis are preoccupied with their fear."1

As we get further into 2011, many are making new predictions on GDP growth, oil, gold, and global markets. For the United States, some are calling for continued growth, with others slightly less optimistic. Few, however, are predicting a rerun of the Great Recession. Now gone from our repertoire (and the news cycle) is the recently popular concept of an economic double dip. And with its exit, we have re-embraced profits while turning a blind eye toward a vital force that surfaced over the past several years and still exists -- market hypochondria.

In both individuals and institutions, investors constantly cry their loathing of volatility -- many relentlessly searching for a way to minimize ups and downs while still achieving superhuman returns. They comb websites and periodicals, interviewing advisors for this particularly rare type of leverage -- small amounts of risk yielding large excesses of profit. And, it has happened yet again. Investors have leaped from risk averse to return hungry, and done so as swiftly as the wind blows.

In years past, one would entirely attribute this jumpy behavior to the well-known, documented psychological battle between fear and greed. But, a new strain of self-imposed emotional trickery is wrecking havoc on portfolios and markets. Through the dark financial times of the past few years (deficits, debts, bad mortgages, politics, unemployment, portfolio losses, risk of a Euro collapse, talk of stagflation), investors displayed a behavior pattern previously unseen. History gives us Bulls and Bears. The recent collision of technology, globalization, and the worse recession in modern history produced another variety of market participant -- Market Hypochondriacs.

A Market Hypochondriac is someone with an overwhelming fear that an event or occurrence will derail their portfolio and cause unsalvageable losses. A Market Hypochondriac has access, information, and motivation. Eventually, every "event" begins to feel like a crisis (a portfolio-illness, if you will). Every occurrence, whether big or small, is misinterpreted as a sign of serious market ailment. These investors remain fixated on their portfolio's imagined sickness and trade accordingly.

The origin of the Market Hypochondriac predates the Great Recession. Prior to the economic collapse of 2008, investors were simply taking too much risk. Those who needed $100,000 of income annually attempted to achieve $200,000. Investors requiring a 10 percent annual return aimed for twice that. The predominantly bull market of the '80s and '90s produced a certain rhythm that only saw gains. Expectations were high, and risk principally ignored. Retirees purchased tech stocks, hedge funds made billions, due diligence went out the window, and a two decade decline in interest rates produced an unprecedented run in bonds. Then, unexpectedly, the masses taking too much risk saw their portfolios (and lives) washed away along with Lehman Bros, Bear Stearns, and more than 50 percent of the value of domestic stocks. And suddenly, no amount of perceived knowledge, access, or technology could stop the onslaught of portfolio panic.

This principal idea, of taking too much risk to begin with, is vital to an understanding of our current markets. In being much too aggressive, investors effectively set themselves up. The 20-plus year secular bull market followed by the most dramatic economic downturn in recent history caused a snowball effect of emotion. The more people lost, the more they panicked. The more they panicked, the more they lost. Our emotional pendulum was pushed so far to one extreme, we are now unable to slow it down as it swings wildly from side to side. It was a sick cycle of investor emotion founded by improper risk taking, and one that unfortunately continues.

Interestingly, investors appear quite comfortable with this new condition of market hypochondria. Despite the soaring value of domestic markets, any sign of volatility is still reason for alarm. And, if we find ourselves void of condemnation in familial markets, we just look outside our boarders for a reason to feel ill. Even the smallest hiccup commences a media frenzy feeding on paranoia and prompting a mass selloff of anything related. Peek for a moment at the debt-contagion in Europe - borrowing rates for many countries rising evermore quickly, not from structural or fundamental change, but mainly the markets overacting and causing higher financing costs that in turn begat even higher financing costs (and so on). It is the consequence of heightened investor emotion unfolding before our eyes. It is fear on steroids. It is the result of participants imagining and now believing their portfolios are sick and in need of constant, immediate care. We even see this hypochondria seeping into our gains - once long-term investors now flocking to any appreciating position, such as gold or silver, as a cure-all remedy for any losses.

We find ourselves amidst a creeping performance killer, blinded by our new addiction to technology, to markets, to reacting, to a preoccupation with the perceived poor health of our portfolios. Rational thought has deteriorated, leaving only a trail of loss, anger, greed, and panic. We have become a product of our own chaos, experts at overacting to short-term trends. In our attempts to constantly control the "health" of our portfolios, our behavior (not our holdings) has quickly become a symptom of a much larger problem. Our efforts to mitigate even short-term volatility is actually creating it. The lesson to be learned - unlike our physical health, where any real illness is bad and must be attended to expeditiously, our portfolios are different or at least should be. A security or sector being down in value does not mean portfolios are sick and need curing. The Federal Reserve putting more money into the economy does not mean inflation is imminent. A bank missing estimates for a single quarter does not guarantee it will fail in the next. And, a very high national debt does not mean the United States will automatically default on its borrowing.

Through the experiences of the last few years we have created this new condition of market hypochondria, fostering portfolios laden with anxiety and reaction rather than intellect and process. Investors must begin to realize they are making their portfolios ill simply by thinking they are sick. Market hypochondria, a powerful and addictive paradigm for viewing financial markets, is real and must be recognized, else we fate ourselves with the consequences - portfolios and markets forever filled with overreaction and marginalized long-term performance.

1''Hypochondriasis." University of Maryland Medical Center. University of Marylad Medical System, 2006. Web. 4 Jan 2011.


Jonathan Citrin is founder and CEO of CitrinGroup, an investment advisory firm located in Birmingham. He is an adjunct professor of finance in the School of Business at Wayne State University.

Published: Thu, May 19, 2011