Strengthening One’s Abilities 43tioned earlier, makes the point. He had bought a large position in
an initial public offering (IPO) of PharMor (a discount drug re-
tailer). For a while he looked like a hero. Earnings were impres-
sive. The stock moved up nicely. But then news turned negative on
the stock and the price plunged. It turns out that the company had
acted fraudulently. The manager exploded, taking it as a personal
affront: “How could they have lied to me, those bastards!” Given
his rather low “emotional intelligence” quota, he stomped into the
trading room and told them to sell the entire position. Even though
the traders, who had cooler heads, showed some concern about his
order, he paid no heed and blew out his entire position, several
million dollars, in an afternoon. That volume of stock drove the
price down further as traders reacted to his orders. In short order,
though, the stock rebounded and returned to its trading range. By
reacting emotionally, this portfolio manager cost his firm more than
$200,000. That’s an expensive emotional indulgence.
Similar incidents occur repeatedly in trading rooms around the
country. Panic, fear, and anger take over and poor trades are the
result. Even the most primitive of solutions—say, a “buddy sys-
tem” in which a portfolio manager would have to run the trades
by his or her buddy—would help eliminate these costly reactions.
One of the advantages of investment clubs and chat rooms is pre-
cisely this ability to filter out the emotion from the decision. Intu-
ition can be a positive ally, but emotion typically is not.
The real danger is that most professional investors are thinking
types and would overestimate their score on Daniel Goleman’s emo-
tional intelligence test. Much like the Dunning research (New York
Times, Jan. 18, 2000), which shows that we all overestimate our
abilities, I’ve found this to be true of investors. In training work-
shops ranging from communication skills to diversity issues, inves-
tors tended to overrate their own abilities.
Investors with a preference for feeling need to balance in the
other direction. They need to cultivate their capacity for objectiv-
ity. An exercise for them could be to watch a grisly news story and05 ware 43 1/19/01, 1:06 PM