Where fear and greed meet

"STOCKS have no memory they don't care. So don't make it personal." So said hedge fund manager Lex van Dam, who in late 2008 gave eight novice investors $1 million to see if they could beat the professionals on the television show Million Dollar Traders (SBS, Tuesday, 7.30pm).

The novices had nothing to lose after all, it wasn't their money. But, with the promise of a fat bonus if the team performed well, they had everything to gain.

And the strain was starting to show in last Tuesday's episode, given they were in the worst economic crisis in a generation amid volatility that saw blue-chip stocks move 10 per cent to 20 per cent in a day.

Because they were operating as a hedge fund, the group had the ability to short a stock or bet on it going down so could theoretically profit in such a market.

But turning that into reality proved something of a challenge.

As contestant Simon, a retired IT consultant, put it: "Drip, drip, drip. More pain today more pain yesterday, which I'm sure is affecting my morale and my ability to make decent decisions the next day."

That comment goes to the heart of successful sharemarket investment: the importance of overriding your emotions to make rational, effective trades.

Another show last week, The Ascent Of Money (ABC, Thursday, 8.30pm), provided an interesting insight into this notion.

The program used past sharemarket bubbles to examine the psychology of investing. Think the monopoly that was the Dutch East India Company France's Mississippi Company, the demise of which indirectly caused the French Revolution the Great Crash of 1929 and, more recently, the rise and fall of Enron, which hid its huge debt off balance sheet in a practice reminiscent of what caused the current crisis.

"Nothing illustrates more than the history of stockmarket bubbles how hard humans find it to learn from mistakes," says historian and host Niall Ferguson.

"[Complete market breakdowns] happen rather more often than many modern theories will have you expect but not so often that we're ever quite ready for the next."

Apparently, despite the hard lessons doled out to those before us (or even to us), we can't help but get swept up in the latest market euphoria, or as former Federal Reserve chairman Alan Greenspan famously put it, succumbing to "irrational exuberance".

In other words, we are easy fodder for booms. Then busts.

"So long as human expectations of the future veer from over optimism to over pessimism, from fear to greed, stock prices will tend to trace a line not unlike the jagged peaks of the Andes," Ferguson says.

The key to protecting yourself is to appreciate that a stock price is much less a reflection of a company's actual value than the crystallisation of the balance of investor sentiment towards that stock putting it another way, the level at which fear and greed settles. Push those emotions to the side and look at a company's genuine worth and you stand a much better chance of success.

So, in tumultuous conditions, did Lex van Dam's team of market virgins prosper? You'll have to watch the final episode on Tuesday to find out. And Thursday night's episode of The Ascent of Money, looking at the relationship between risk and return, is one to catch, too.